Every central banker were busy raising rates but Bank Negara surprised everyone by leaving rates unchanged at 3.5%. That was the 18th consecutive time. The main argument Zeti made was that concerns were greater over growth issues rather than inflation. The other main point Zeti is making is that you need not necessarily use just the interest rate to fight inflation.
Higher rates would generally mean a stronger ringgit. Not raising rates when everyone is doing that should suggest weakness in the ringgit - but not in this case. If we were to look back to the period prior to the jump in petrol prices and electricity rate hike, Bank Negara was already doing an excellent job managing the balance sheet and growth issues for the past few years. Under Zeti, Malaysia has recorded one of the highest percentage improvement in reserves globally. If were to strip out those recent hikes, Malaysia was operating under a pretty flat interest rate environment next to Japan. The rapid ease off in oil prices and related commodities, and more importantly a weightier and prolonged bailout needed in the US, may have swayed Zeti to fear for a decelerating growth phase brought on by these issues.
I am sure Zeti monitors the Baltic Dry Index, which is a great measure of trade activity especially among emerging countries, which has broken the support line of two previous lows back in June. This points to a decelerating environment in emerging markets as well. Put that with the dire situation in the US and the outlook is not that bright. Naturally a lot of people would point to the fact our CPI does not fully capture things happening in the real economy. That being the case, Bank Negara should be aware of the real hike in cost of living already. In an environment of a global contraction (though not a major one), the real fight would be to ensure that jobs are secure. Sure inflation is a nasty thing but this would also point towards Zeti having confidence to allow the ringgit to appreciate further even without raising rates, thanks to the solid fundamentals. A strong ringgit would at least thwart some of the imported inflation. Raising rates aggressively now may fight inflation but may kill off the housing side and lending side as well.
Recent CPI has gone above 6% but that is largely a knee jerk reaction to the recent petrol and electricity hikes. Yes, these hikes would be working its way into the rest of goods and services but it shouldn't be unmanageable. Its not that Zeti would not be raising rates in the coming months, but rather I think Zeti wants to see how the very fluid factors will affect the domestic economy in the months ahead because many major developments have happened over the last 2 months alone:
a) oil zooming from US120-145, and then back towards US123
b) the commodity prices have all eased significantly, though still ahead on a ytd basis
c) locally the partial removal of subsidy for petrol, and a hike in electricity rates
d) the near collapse of Fannie & Freddie, and the 100 odd banks in the US in grave danger of bankruptcies as well
e) the BDI falling past the two previous lows which is pretty negative
Hence in that light, it would be understandable for Zeti to want to see how the domestic economy interacts and reacts to these multiple changes in parameters before moving the rates. Still, in my view, though oil price may have eased off and there is still some slowdown in emerging markets, we will still see firm commodity prices going forward because the amount of infra spending in many emerging markets are not easing at all. The iron ore new price is a great indication of genuine demand. If iron ore for the next 2 years is going to cost US97, well steel bars are not going to come down. Even if oil settles at US110, it is still at a very high level compared to last 2 years. These are the things that are working its way through global goods and services, and a rate hike is inevitable.
p/s photos: Kristy Yeung
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