INTEREST RATE HIKES ~ THOUGHTS OVER BLACK COFFEE AND SCONES

In a recent article titled: “Economist warns against raising OPR” on the online publication Free Malaysia Today (FMT), dated July 5th 2022; I thought it interesting to comment on as generally, most countries are facing some form of economic crisis or are heading for it.

One of the main reasons or causes for this worldwide crisis is the Covid-19 pandemic over the last two year period from March 2020 to current time. Though it may seem to have been “conquered”, it is still very much present. China is still struggling to control it. Other countries are seeing a resurgence of it to a certain extent and seem to be able to control it with a 4th dose of the vaccine, if needed. During the pandemic, governments gave out a lot of financial aid, at the same time, with hardly any income to refill their coffers.

The cause for the disruption in mainly the food, oil and gas supply chain by the war that is going on in Europe between Russia and Ukraine.

Inflation is another reason. Too much money in the market chasing after too few goods. Thus, the rise of inflation. Several developed countries are facing inflation rates of well over 6%. (1)

An interesting indicator is the price of oil. Since, the market driving forces which are the people on the ground, i.e. the everyday people; are cutting back their spending and traveling because petrol (called “gas” in the U.S.) were at record highs. A major result of these cut backs is that the price of Brent has dropped from a high of US140 in May 2022 to a current price of US$102. A direct result will be lower petrol (gas) prices. In Malaysia, we will not see a change in RON95 prices due to the fuel subsidy in place.

“Economist warns against raising OPR” It seems like it is a “Catch 22” situation. Why?

Most countries raise interest rates to curb inflation. Malaysia’s inflation of below 3% is under control. So, why raise interest rates?

Looking at the face value of things now, BNM needs to raise the OPR to stem the widening gap between the U.S. dollar and Ringgit, as the U.S. FED continues to raise interest rates to stem the increase of their inflation and bring it under control. So, increasing the OPR will slow the pace of the widening gap.

On the other hand, if BNM does not raise  the OPR, it may be good for Malaysians only in the very near short term. It may be good if we are self-sufficient, which we are not. We rely heavily, on imports. Most of our purchases are in U.S. $ denomination. In the mid-to-long term, it could broadly take us a longer time to recover from an inflation hike if it should hit us.

Re-introducing the peg could be the answer. But, this could see an exit of foreign funds. Unless, there is a temporary block to the exit of foreign funds.

University of Rochester / Sarah Mossey

Notice how prices of everyday food, clothes etc, go up when fuel goes up; but rarely ever comes down when the price of fuel drops. It will not be entirely right to blame the retailers / shops on the street for this “phenomenon”. The whole supply chain has to adjust their costings downwards for consumers to see this effect. The question is, why can’t the same mechanisms used to raise prices of goods so quickly when interest rates go up, be used to reduce prices at the same pace as raising prices when interest rates drop?

~ The scones and kopi O kosong (2) was a good way to start this Saturday morning.

NOTES
1. For a full list of countries and their inflation rates: Trading Economics, https://tradingeconomics.com/country-list/inflation-rate-
2. “Kopi O kosong” is black coffee with no sugar in the Bahasa Malaysia language of Malaysia.

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