kuala lumpur: Bank Negara Malaysia (BNM) Governor Tan Sri Noor Shamsia Mohd Yunus (Pix) today wrote to the editors a letter titled “Monetary Policy is Preemptive, Not Premature.” See below.
Monetary policy decisions affect many aspects of a country’s economy. As such, such decisions are often closely monitored and debated not only by financial markets but also by the general public.
The lively conversation surrounding the BNM Monetary Policy Committee (MPC) decision to raise the OPR by 25 basis points on May 3 illustrates this fact.
OPR’s decision is not one we take lightly. There are many factors that MPC considers. Our analysis is based on extensive forward-looking data and engagement with various industries and consumers.
In addition to the Monetary Policy Statement itself, we also publish other explanatory materials (such as simplified snapshots of the Monetary Policy Statement and frequently asked questions) on our website and social media.
In this letter, we hope to provide further background and color to the MPC’s actions and clarify some points that have been made in the public debates we have observed.
Raising operating margins will affect economic growth
BNM’s mission is to maintain price stability leading to sustainable growth of the Malaysian economy.
In doing so, banks keep this objective in mind and pursue monetary policy that is in the national interest. This means taking a long-term view of policy measures, including OPR decisions, rather than just considering the immediate impact of our actions.
All central banks work under the same premise.
Past and recent decisions regarding OPR are based on this principle. At each meeting, the MPC carefully walks a policy tightrope, balancing risks to economic growth and inflation.
We will meet over the next few days to review and discuss various indicators and macroeconomic models for assessing the health of the economy and inflation.
A review of shared feedback and observations from households, businesses and market players will also provide a better understanding of developments on the ground and economic conditions across all sectors of the economy, up and down the country.
It is important for MPCs to be cautious and proactive. BNM was one of the first central banks in the region to begin normalizing interest rates last year, as evidenced by our country’s lower-than-regional inflation rate.
Also, we want growth to continue steadily and not engineer slowing growth or a recession to keep inflation down. This is a specter many countries face and we would like to avoid.
In normalizing the OPR, we tried to do it in a way that favored the economy. The increase was therefore done cautiously and step by step. In fact, it was smaller and slower than the toll adjustments made in the region over the past year.
We paused twice to assess the cumulative impact of last year’s operating margin increase.
This is because monetary policy measures take time to propagate through the economy, and it was important to watch for signs of excessive tightening in monetary conditions.
Here’s the big picture we gleaned from the May 3 MPC conference and other recent conferences. In short, our economy continues to show strength. GDP growth in the first quarter of 2023 was 5.6%, stronger than before the pandemic. Hiring is also progressing.
There are various indicators of continued strength in domestic demand, including retail spending, car sales and tourist arrivals. We expect our growth outlook to remain resilient going forward, based on a number of forward-looking indicators, including loan growth, and insights from companies across all sectors, including backlogs, export orders and business outlook. doing.
The MPC considers a wide range of indicators to form its views on the outlook for growth and inflation. All relevant information, both global and national, should be considered holistically. Data cannot be considered in isolation.
This is very important for the MPC to make informed decisions about the state of the economy. The Purchasing Managers Index (PMI) is tracked alongside other indicators, but individual indicators alone are not the sole basis for determining appropriate policy stances.
After the previous moratorium, and with inflation easing, there is no reason to raise rates
When it comes to inflation, the situation is even more nuanced. In fact, as some have observed, cost pressures are easing. Headline inflation fell, with average inflation in the first quarter he at 3.6%, lower than his 3.9% in the previous quarter.
Much of this downward trend was driven by falling RON97 prices, which contributed about two-thirds of the Q1 decline.
However, despite some easing, prices are expected to remain high compared to what Malaysians are accustomed to. This is because demand remains robust against the backdrop of the economic recovery.
Core inflation, a proxy for demand-driven inflation, remains high, averaging 3.9% in the first quarter compared to its long-term average of 2.1%.
In summary, from a macroeconomic perspective, economic conditions are even above pre-pandemic levels. It is therefore not surprising that macroeconomic policies will be readjusted to reflect this, generally returning to pre-pandemic levels.
Against this background, MPC decided that it was the right time to normalize OPR. Some argue that our policy normalization is “premature”, but we aim to act preemptively because it costs the economy less than waiting until it is too late. .
As in other countries, once inflation takes hold, much larger and faster operating margin hikes will be needed to contain it.
A “too low” interest rate environment for too long could also have adverse effects on the economy. Rooted in the US housing market, the devastation of the global financial crisis within the last two decades is a solemn reminder of this.
Further operating margin hikes were widely expected among financial market players in line with the central bank’s “gradual and prudent” path to normalization ahead of its May decision. , there were differing views on its exact timing. gain.
While many expected it to take place in the second half of the year, some noted that May was the right time to prevent inflation from settling in, given resilient economic growth.
We are not out of the woods yet, so we must be vigilant.
OPR hike is causing financial hardship for borrowers
We recognize that an OPR increase may affect some people more than others.
The OPR is designed as a blunt instrument to achieve price stability. In its transmission to the economy, it does not distinguish between those who have loans and those who do not.
That said, borrowers (B40 or M40, individuals or businesses) who may be facing difficulties repaying their loans should contact their bank or AKPK to find alternative repayment arrangements that work for them. can find. Borrowers in need can receive assistance and such customized arrangements benefit both borrowers and banks.
That said, more than 50 percent of loans from B40 and vulnerable groups are fixed rate instruments.
Therefore, monthly repayments from these fixed rate loans are not affected by OPR increases.
But this will affect everyone unless the excessive price pressures we are seeing in some other countries are addressed.
If inflation gets out of hand, it will be the B40 and vulnerable groups that will be most affected, unable to sustain sustainable growth over the long term. We cannot and must not allow it.
OPR not helping ringgit
The ringgit’s value against other currencies is determined by the market. It reflects the ongoing development at home and abroad. At the moment, the movement of the US dollar remains the main factor influencing other currencies, including the ringgit.
In particular, rising demand for the US dollar was partly due to uncertainty over the US government’s debt ceiling and a disappointing April economic data from China.
Views on the importance of trade ties between Malaysia and China further weighed on sentiment on the ringgit.
In addition, operating margin growth is at a more modest pace compared to major and regional peers, with the lowest operating margin in the region.
Under a flexible exchange rate regime, it is reasonable to expect the ringgit to fluctuate from time to time. Such adjustments are necessary to enable domestic economies to adapt to global economic and financial shocks.
In 2022, the ringgit temporarily fluctuated by 11.5% from the end of March to the beginning of November, but rose towards the end of the year.
Still, the real economy grew by 8.7% in the same year. In this way, exchange rates and deeper financial markets protect us from adverse external shocks.
Malaysia still maintains an open economy, and the BNM’s role is to ensure that excessive volatility of the ringgit is contained in the short term.
Current policy priorities are to sustain economic growth in a stable price environment and to further strengthen domestic economic fundamentals through structural reforms.
BNM has been adamant in demanding and defending structural reforms. This would be a more permanent support for the ringgit rather than short-term measures and monetary policy decisions. – Bernama
