Malaysia’s inflation woes

by Erin.

Malaysia’s ringgit slumped to its lowest point in more than seven weeks after the country’s central bank unexpectedly refrained from raising interest rates amid the fastest-growing inflation rate in 26 years. 

Bank Negara Malaysia on Friday kept its overnight policy rate at 3.5 per cent, which is the same rate it has kept since April, 2006, holding off from raising rates even as a June 5 increase in the price of fuel brought inflation to 7.7 per cent, the fastest it has increased since 1982, according to Bloomberg. Bank Negara also raised its inflation forecast for this year to as much as 6 per cent. The Malaysian ringgit’s slump happened on Monday, the same day the Bank of Thailand announced that Thai inflation had hit an 11-year high. The central bank forecast that headline inflation would reach 7.5 to 8.8 per cent this year. The central bank attributed rising inflation to higher oil prices.

The Bank of Negara said that the central bank’s decision was based on the calculation of two risks – that of higher inflation and that of slower growth. The Malaysian central bank calculated that rising interest rates might not be the best option for the country.

In Thailand, there are certain economists who would prefer the Malaysian approach – that is to leave the rate unchanged to promote economic growth. Finance Minister Surapong Suebwonglee earlier expressed his disagreement with the Bank of Thailand’s decision to raise the policy rate by 25 basis points. Malaysia may have room to maintain low-interest rates due to certain advantages it has. For instance, the country has oil reserves, while Thailand is a net importer of oil. However, the Malaysian central bank will still face the dilemma of whether to raise the rate in the near future. The recent sell-off of the ringgit reflects the market’s disappointment with the decision.

Surapong said that time would tell if the Bank of Thailand’s decision to raise the interest rate would bode well for  the economy in the long term. But the way things stand now, it seems that the central bank made the right decision, as choosing to maintain the rate as it was might have affected the currency and asset prices.

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One Response to Malaysia’s inflation woes

  1. Pingback: Interest Rates » Malaysia’s inflation woes

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