Monetary policy adjustment critical, says Bank Negara governor

KUALA LUMPUR: The adjustment of the monetary policy is absolutely critical to avoid the need to be overly aggressive in raising interest rates, says Bank Negara Malaysia governor Tan Sri Nor Shamsiah Mohd Yunus.

However, she said the pace would be gradual, after the central bank raised the Overnight Policy Rate (OPR) by 25 basis points on May 11, which took the market by surprise.

“Any adjustments would affect both depositors and borrowers alike. While the higher OPR may affect the borrower (having) higher loan repayments, it also leads to higher deposit returns to encourage individual savings to rebuild their financial buffers impacted by Covid-19,” she said after announcing Malaysia’s gross domestic product growth of 5% for the first quarter of 2022 here yesterday.

Nor Shamsiah said Bank Negara also recognised that some households would require targeted assistance.

“At the height of the pandemic, the economy required unprecedented support, that was when the OPR was reduced to such a historical (low) level.

“But when the patient recovers and leaves the ICU, he still requires rehabilitation and some of (these measures) could be painful,” she said, drawing an analogy between an ICU patient and the economy.

“The same goes with the OPR. The OPR needs to be recalibrated with the realities on the ground. The economy is on a firmer footing. There is an improvement in the labour market and it is appropriate to recalibrate the monetary policy.”

Nor Shamsiah added that the central bank had priced into its growth projection the impact from the Russia-Ukraine conflict, but the Covid-19 resurgence and lockdowns in China would weigh on global growth.

However, Bank Negara is optimistic about global growth projections amid improvement expectations of economic activities in China when the country reopens.

To a question on the interest rate potentially at 3% by the end of 2023, Nor Shamsiah said Bank Negara was currently removing excess monetary accommodation.

“The increase depends on how strong the economy grows, and the impact it has on inflation. We will not to rule out completely that the pace of adjustment would not change,” she said.

On the proposal by some to peg the ringgit to another currency, she said this would not be in the country’s best interest as it too would have substantial risks, one of which was mirroring the monetary policy of the country that the local currency was pegged against.

Nor Shamsiah said maintaining a peg would be a very costly policy as it took up a sizeable amount of reserves, especially in the last decade, and this would weaken Malaysia’s external resilience.

“A peg will have detrimental effects on investors’ sentiment, affecting not only foreign direct investment into Malaysia but also leads to capital outflows from Malaysia,” she said, adding that BNM did not target any level of exchange rate, and would ensure there is no excessive volatility in the exchange rate and conditions in the financial market.

“We have to acknowledge that the key factor that contributed to our ability to successfully track the ringgit in 1998 was the capital controls that were introduced back then,” she said.

On the weakening of the local note, she said it was largely driven by external factors, with the fact that growth in the United States was very strong and inflation was rising.

“On top of that, we have a lot of uncertainties in the global economy, including the ongoing conflict in Ukraine and uncertainty in China due to the lockdown,” she said.

She also said the Volatility Index (VIX) had also gone up constantly, which resulted in a stronger US dollar, while currencies in other countries were seen to depreciate against the greenback.

“Movement in the ringgit is in line with other regional currencies, and again, I would like to stress having a flexible exchange rate is most appropriate given current circumstances,” she said.

Nor Shamsiah said the onshore foreign exchange trading volume in the local market had been healthy, and the volatility in the domestic onshore market had been somewhat not very far from the daily volatility rate.

She added that the flexible exchange rate buffered the economy and also preserved Malaysia’s competitiveness.

According to Bank Negara, the ringgit depreciated by 0.7% against the US dollar in 1Q of 2022, and 4.7% as of May 11, broadly in line with the movement of regional currencies.

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