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INFLATION
By Pauline Yong
21-4-2006
Exchange rate policy or monetary policy to curb inflation?
With our Consumer Price Index (CPI) rose to a seven year high of 4.8%
from March 2005 to March 2006, it makes us wonder whether this would
hurt our economy. If yes, how to overcome it?
The exchange rate advocates believe that having our currency appreciates
will reduce the pressure on this cost driven inflation. When our Ringgit is
stronger, imports will become cheaper, prices for imported goods and
services such as crude oil, commodities, and other intermediary goods will
be cheaper too.
As these commodities are quoted in US dollars, we can benefit from the
exchange rate policy as our currency against the US dollar has appreciated.
And thus, release the pressure on inflation.
Monetary policy on the other hand works well if the inflation is driven by
demand. For example, during the financial crisis in 1997, Bank Negara
raised interest rate (more than 10% within a year) in an attempt to curb
inflation. But, it was later proved to be an “overkill” for our economy as
our GDP contracted by 7.1% in 1998.
This time round, should we raise or not raise interest rate? As our
inflation is cost driven, raising interest rate will definitely hurt our
economy. However, when our CPI has risen more than our Fixed Deposit
(FD) rate, how would average consumers like me or you feel about our
hard earned savings in the bank? Clearly, we feel poorer.
Moreover, with US Federal kept raising their interest rate (an attempt to
balance up their Balance of Payment), the rest of the world including
Malaysia, have to keep up with the pace.
Hence, Bank Negara is actually balancing between exchange rate policy
and monetary policy. On one hand, the exchange rate policy is to curb
inflation, on the other hand, monetary policy is to keep the people happy,
at the same time, not to dampen the business sector.
Fortunately, Malaysia has a strong guidance from our Bank Negara
Governor, Dr. Zeti. She has won numerous international awards for being
the “Best Central Bank Governor” in the region. Hence, we are confident
that she will see us steering through this crude oil crisis.
By Pauline Yong
21-4-2006
Exchange rate policy or monetary policy to curb inflation?
With our Consumer Price Index (CPI) rose to a seven year high of 4.8%
from March 2005 to March 2006, it makes us wonder whether this would
hurt our economy. If yes, how to overcome it?
The exchange rate advocates believe that having our currency appreciates
will reduce the pressure on this cost driven inflation. When our Ringgit is
stronger, imports will become cheaper, prices for imported goods and
services such as crude oil, commodities, and other intermediary goods will
be cheaper too.
As these commodities are quoted in US dollars, we can benefit from the
exchange rate policy as our currency against the US dollar has appreciated.
And thus, release the pressure on inflation.
Monetary policy on the other hand works well if the inflation is driven by
demand. For example, during the financial crisis in 1997, Bank Negara
raised interest rate (more than 10% within a year) in an attempt to curb
inflation. But, it was later proved to be an “overkill” for our economy as
our GDP contracted by 7.1% in 1998.
This time round, should we raise or not raise interest rate? As our
inflation is cost driven, raising interest rate will definitely hurt our
economy. However, when our CPI has risen more than our Fixed Deposit
(FD) rate, how would average consumers like me or you feel about our
hard earned savings in the bank? Clearly, we feel poorer.
Moreover, with US Federal kept raising their interest rate (an attempt to
balance up their Balance of Payment), the rest of the world including
Malaysia, have to keep up with the pace.
Hence, Bank Negara is actually balancing between exchange rate policy
and monetary policy. On one hand, the exchange rate policy is to curb
inflation, on the other hand, monetary policy is to keep the people happy,
at the same time, not to dampen the business sector.
Fortunately, Malaysia has a strong guidance from our Bank Negara
Governor, Dr. Zeti. She has won numerous international awards for being
the “Best Central Bank Governor” in the region. Hence, we are confident
that she will see us steering through this crude oil crisis.
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