Do you still remember that most of the market analysts(including our government) in Malaysia claimed that “Malaysia is a safe haven” when credit crunch crisis started deteriorating in U.S.? Yea, they may be right, this is simply because none of our banks or financial institutions involved directly in U.S. Supreme loan Crisis.
In fact, U.S. is now being threatened by economy recession as well as high inflation(Note: U.S. might already in a recession). As a result, their demands for goods & services will definitely decline. In such situation, Malaysia can never escape from it’s impact. Because this will somehow affects the export of Malaysia(Note: US is one of the largest export markets for Malaysia) and hence impacts our economy in general.
However, some of those economic and political “experts” in Malaysia always clung to the notion that “Our local and regional demands is still strong enough to neutralize the impact of recession in U.S.”. Anyway, such “fairy tale” seems had already come to an end. This is simply because the whole world including Malaysia are now facing food crisis and fuel price hikes. As a consequence, the people including Malaysian had no choice but to face the high inflation in their daily life.
Apart from rising in prices of the imported rice(i.e. the main food for Asian) by around 100%, the latest news was the Government of Malaysia had announced an increase in petrol price by 41% and diesel price by 63% in which had started immediately on 5th June 2008. This is the largest increment in fuel prices in the history of Malaysia. The effects had already started to kick in. E.g. rising in the transportation fees, foods prices & etc. As a result, the cost of living must go up and the purchasing power of consumers must go down.
Once the purchasing power of consumers had declined, how far the statement sounds “Our local and regional demands is still strong enough to neutralize the impact of recession in U.S.” will still be true? Obviously, such statement is really ridiculous in the current context. With shrinking wallet, most of the people will more likely to keep just those necessities and sacrifice those unnecessary expenses(E.g. entertainments, trips, investments, shoppings & etc).
As a consequence, the sales made by the businessmen who owned factories, shops and etc will also decreased at the end. While the operational costs are rising but the sales and profits are dropping, the businessmen may start thinking of cutting costs by reducing the labours and so on. Some might even face bankruptcy. E.g. the airline companies. If such situation happened, the soaring unemployment will further deteriorates the economy. Therefore, if we don’t handle such situation carefully, then a disastrous recession will be awaiting us.
Next, what would be the decision of the central bank in the monetary policy that applied to overcome the current crisis? While the operating costs & the inflation rate keeps climbing; But the GDP expected to be slowed down. It’s really a tough decision for the Bank Negara(i.e. the Central Bank of Malaysia) to decide whether to increase the interest rate or keep it unchanged. By increasing the interest rate, the costs in doing any business will definitely increase. Furthermore, this would also cause the people to be more likely to just put their money into the fixed deposit account. I’m sure that such situation will not be favored by most of the businessmen.
So, should the central bank just keep the interest rate unchanged? Okay, let’s say the central bank decided to keep the interest rate unchanged; In your mind, what’s the situation that might happen instead? I think most of the banks and financial institutions will started to tighten their lending procedures. Because they are facing the risk in which the interests earned from the lending process is unable to cover the increasing inflation. As a result, the companies can’t borrow money as easily and hence slow down the activities of economy. Anyway, from my point of view, a moderate increase(i.e. around 0.25%) in the interest rate would be a better choice for the current context.
In fact, such type of inflation isn’t mainly caused by the consumers in the markets. But it had been caused by the speculators(i.e. those with plenty of fund) who trying to make profits from their speculations in the crude oil and other commodities like gold & etc. As a result, such speculators making huge money from it but billions of others suffering from the fuel and food price hikes. Of course, those have been exploiting the resources by simply declaring wars on others should be blamed too.
