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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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