CME-BAA Macroeconomic Observatory (MEO): BANK NEGARA DECISION TO KEEP THE RATES UNCHANGED IS WELCOM
Updated: Mar 1
The CME-BAA Macroeconomic Observatory (MEO), a joint platform promoted by the Center for Market Education and Bait Al Amanah, welcomes Bank Negara’s decision to keep the reference rates unchanged.
According to MEO, in the current scenario, the efficacy of monetary policy in relaunching investment activity would be very limited. “The experience from other parts of the world, such as Europe and Japan – explained Dr Carmelo Ferlito, CEO of the Center for Market Education – shows us that even decades of negative interest rate are not enough to stimulate the economy. Monetary policy is not the magic stick it is often believed to be”.
In a complex reality, economic outcomes are the result of multiple factors, and first and foremost it should be stressed the uncertain nature of such outcomes because of the key role played by signal interpretations from the economic agents.
“The key driver for sound growth is profit expectations” – added Fariq bin Sazuki, an economist at Bait Al Amanah – adding that “we should focus on creating the right environment to boost those expectations rather than simply focusing on monetary policy. If profit expectations do not rebound, then we will not have sustainable growth, no matter how low the interest rates are”.
Under this perspective, the MEO emphasizes that the gradual ease of the movement restrictions and the vaccine roll-out are playing an important role, but the sky still remains clouded by political instability and the lack of a general economic strategy which would also include the reopening of international borders.
MEO invites the government to do more in order to identify an economic strategy which is beyond the need of the day, focusing on a comprehensive plan to rebuild confidence in the country.
With regard to monetary policy, instead, MEO stresses the importance to remain on the prudent path and to recognize the role that an increased level of saving can play in soundly financing new investments. Savings are the real and sound source of financing for long-term investment projects and extremely low interest rates would discourage the accumulation of saving, while pushing for artificial credit and the potential risk of a boom-and-bust cycle.
Furthermore, a monetary policy which is too aggressive would drive up inflationary tendencies, deteriorating purchasing power and further discouraging saving.