MARCH 10 — The decision by Bank Negara to hold interest rates steady is the right choice based on the current and expected outlook for the Malaysian economy during 2023.
Keeping the OPR at 2.75 per cent is supported by the most recent data on domestic inflation, the Malaysian business cycle and likely international events.
The consumer price index (CPI) data for January shows the annualised monthly percentage below 3 per cent over the last six months and around 2.5 per cent over the last three months so inflation is on a very positive downward trend.
Looking at the components of the CPI by sector, only two sectors look problematic. Prices of food and non-alcoholic beverages rose by 6.7 per cent and prices in hotels and restaurants rose by 6.8 per cent.
The other components of the CPI index are very modest or flat. So, the Economy Minister is right to point out that over the last six months there is no particular problem of generalised increases in prices but a specific problem in two sectors.
There is more positive news from the prices of manufactured food items which are slowing down considerably. This will slowly pass through to consumer price.
We can also see inflation in the service sector which has been the most dynamic part of the inflation processes in recent months is moderating to an annualised rate of 3.3 per cent in the last three months.
Producer prices have been falling for the last six months suggesting there is no inflation in the pipeline. Prices of finished goods have fallen around 1.5 per cent from a peak in July and in January the Producer Price Index (PPI) actually contracted 0.8 per cent compared to December.
Looking at the breakdown of PPI at each stage of production crude materials and at intermediate goods inflation has dropped considerably in recent months.
These decreases will pass through the distribution chain strengthening the evidence that we are in a new phase.
Inflation has been generally well-behaved over the last six months, there is no problem of a generalised increase in prices and pipeline prices are also falling.
The latest GDP data also suggests that holding the interest rates steady is the right decision. GDP in 4Q 2022 contracted at a rate equivalent to 10 per cent on an annualised basis and private consumption also contracted. This is a warning sign which must be given proper consideration.
The weakness extends to all the sectors and in particular to the industrial sector, where it is reflected not only in the prices but also in stagnation of output and tighter profit margins.
International trade also tightened in the fourth quarter of last year and this might continue in the first quarter of this year pushing GDP down further.
According to our calculations, there is probably a 50 per cent chance of a second consecutive quarterly contraction of GDP which is a so-called “technical recession.”
In our view, a technical recession is probably currently taking place and is a precursor to the new phase that we call the “Great Transition,” which is a sudden and sharp change from the skyrocketing economy in 2022 growing well over potential with high inflation, to a lower growth, lower inflation environment in 2023.
This transition is not only happening in Malaysia but there are signs in other Asian countries, such as Indonesia.
In addition to the domestic factors we have to add the uncertainties of the international economy and the international financial environment, especially given hawkish statements from the Federal Reserve.
Rather than signal that Malaysia should follow suit with higher interest rates, these support the view that monetary policy here should remain accommodative and support domestic growth.
When factoring all these components together we are more certain that the decision to maintain the OPR at 2.75 per cent is the right one and we expect that interest rates will remain around this level for the rest of the year at least until we get clarification of the path of the international economy and financial markets.
The food price problem remains urgent and serious but it has to be addressed with sector-specific policies, not with the blunt instrument of interest rates.
At the moment, the stability of prices overall is almost guaranteed by lower oil and other raw material prices and by government policies on utilities prices which affect key items in the consumer price index.
For the time being this should be enough to bring headline inflation into the range of 2.5 per cent to 3.0 per cent, by the middle of the year and the effects of earlier OPR hikes, which take around 12 months to impact the economy will have an effect after that.
This will protect the purchasing power of the rakyat and in particular of the weakest part of the population.
Toward the end of the year, it will be possible to re-evaluate any changes in the monetary policy. By that time, we will have a clearer idea of the international scenario and it will be possible to change the stance of the monetary policy accordingly.
All options should be open, including a possible cut in the interest rates in case of an international recession.
* Professor Paolo Casadio is an economist at HELP University and Professor Geoffrey Williams is an economist and Provost for Research and Innovation at Malaysia University of Science and Technology. The views expressed are those of the writers.
**This is the personal opinion of the writers or publication and does not necessarily represent the views of Malay Mail.
