A few days ago, someone asked me what I thought the outcome of the BNM monetary policy on the 24th October would be. I casually mentioned 'no change' for the reasons being:
-Inflation is tapering off as we head towards the last quarter of 2008. You raise interest rates to curb inflation because higher interest rates curb money supply the fastest- higher interest rates encourage savings, discourages new loans from being dispensed thus slowing down spending in the economy. When inflation is trending down, BNM does not find it useful to increase interest rates.
-During an economic downturn (that's where we are heading) interest rates are normally reduced by central banks so that more money is circulated in the economy to encourage spending.
Malaysia's economy especially in the last quarter of 2008, technically speaking, is neither inflation nor recession. Inflation is tapering off, and the economy is also growing but growing at the rate which is outside the recession definition. We are neither here nor there and the economy is stagnant. Hence the best monetary position for Bank Negara's monetary policy is 'no change'.
Other central banks in the region
Benchmark interest rate
Thailand 3.75% likely to remain unchanged for the rest of 2008
Indonesia 9.50% increased 3 times in 2008!
Vietnam 14.0% increased 3 times in 2008!