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PETALING JAYA: The latest aggressive interest-rate hike in the United States will likely put Bank Negara in a dilemma, with the central bank having to choose between saving the economy or preempting an increased outflow of funds that could further weaken the ringgit.
It is typically expected that Bank Negara would follow the “footsteps” of the Federal Reserve (Fed) – the Bank Negara equivalent in the United States – in adjusting the benchmark interest rate.
This is to maintain a certain level of interest rate differential.
A differential that is too narrow could incentivise investors to cash out from Malaysia and park their monies in US assets.
Currently, the benchmark interest rate in Malaysia or the overnight policy rate (OPR) is 2%.
Economist Manokaran Mottain told StarBiz that the inflation in Malaysia has not spiralled out of control and that the inflation is more driven by higher costs, rather than demand. “An aggressive OPR hike would not work in Malaysia.''.
Meanwhile in the United States, the federal funds rate ranges between 1.5% and 1.75% – not far off from Bank Negara’s OPR.
On June 15, the Fed raised its rate by 75 basis points (bps), after hiking it by 50-bps in May.
The sharp rate hike came as the inflation in the United States hit a 40-year high in May 2022.
However, local economists opined that Bank Negara should avoid raising the OPR as aggressively as the Fed.
An aggressive hike in interest rates comes with a huge cost – deceleration in economic recovery.
Economist Manokaran Mottain told StarBiz that the inflation in Malaysia has not spiralled out of control and that the inflation is more driven by higher costs, rather than demand.
“An aggressive OPR hike would not work in Malaysia.
“We can’t compare our situation to the United States. The US’ reopening of the economy was earlier than Malaysia, so domestic demand in the country has improved faster than us.
“The higher rate by the Fed would have factored in the demand-pull inflation, not just the cost-push inflation,” said Manokaran, who is also a director of Malaysia Venture Capital Management Bhd.
Malaysia University of Science and Technology economics professor Dr Geoffrey Williams said the mentality of “chasing the tail of the US” will put great pressure on Bank Negara’s Monetary Policy Committee.