Malaysia never ever stop bleeding profusely since 1957

Dealing with inflation and capital flows

A QUESTION OF BUSINESS
By P. GUNASEGARAN

A delicate balance is called for in implementing the right policies and measures

BANK Negara, while releasing its annual report for last year earlier, zoomed in on two problem areas which could derail long-term economic growth – inflation and the inflow of hot money.

Both of these pose a potent combination which if not handled delicately and with a great deal of sensibility can actually cause economic recovery to be throttled, leading to a premature and unnecessary downturn in activities that increase income.

It’s a fine balancing act that needs to be constantly monitored and tuned to ensure that just enough is done to tackle the underlying problem without squeezing the availability of credit to those who need it to contribute to economic activity.

At the same time, one needs to be mindful of keeping the cost of credit at low enough levels by ensuring that interest rates do not climb up too high in an environment where liquidity continues to be easy.

An across-the-board increase in interest rates is most likely not the right thing to do now especially since its sledgehammer effects do not discriminate against any one and has the effect of pressing demand down across all sectors, even those where we want to see some growth.

As an example, there may be arguments that the condominium market may be overbuilt right now but to put a dampener across the entire property sector by raising interest rates would be the wrong thing to do because there is real demand for other types of residential property, especially medium and low-cost housing.

Thus, Bank Negara was right when it chose to impose administrative measures such as restrictions on third property purchases (where a 30% downpayment was required) to cut down on unwarranted speculation which was driving the prices of high-end residential properties up.

On the funds side, continued inflows on the back of a stronger ringgit and relatively higher interest rates compared to developed countries continue to play havoc with the financial system. Raising interest rates will only worsen things as it will attract more funds.

Thus, the doubling of interest-free funds that banks have to keep with the central bank from one to two per cent of deposits is an appropriate measure because it mops up some of the excess liquidity from the system. At the same time it is not at such a high level that it crimps the ability of banks to lend or raises their cost of funds.

Bank Negara has chosen to deal with the problem of rising household debt – housing loans, car loans, personal loans, credit card loans etc – by requiring banks to be more stringent in their loan approvals and raising the bar for credit cards.

However, it is not certain how exactly this will work out because history shows that when banks have too much money they tend to be lax about how they lend it – short-term loan growth is often favoured over long-term potential problems.

But what comes as some disappointment is Bank Negara’s reluctance to rein in the excessive margins that banks make on household loans, barring those for property which are heavily collateralised.

For instance, it continues to be ridiculous to charge RM50 in late payments for credit cards when a holder still has not even exceeded the credit limit for his account and continues to pay interest – and a very high 17% interest at that – on his outstanding sum.

For now, it would most probably be wrong to raise interest rates even if raising it would give a better rate of return to savers in the face of rising inflation because much of the inflation increase could be due to one-off price increases and may revert to normal.

If price increases continue, then it may be necessary to reflect the overall increase in costs to an increase in the cost of funds by raising interest rates as well so that savers do not lose out to inflation. That’s the balancing part which is going to prove to be very difficult to do this year.

But given its track record, one hopes that Bank Negara will come through with the right measures or mostly right measures as it so often had in the past.

Managing editor P Gunasegaram believes conventional wisdom does not work in unconventional times.