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Is Malaysia experiencing 'cantillon effect' and will this lead to more interest rate hikes?

18/05/2022 10:10 AM

By Nurul Hanis Izmir

KUALA LUMPUR, May 18 (Bernama) --  Bank Negara Malaysia (BNM) recently made a surprise interest rate hike, its first hike since July 2020, an uptick that was only expected in the second half of this year. Whether a second “dose” of rate hike or even a “booster shot” is necessary for the remainder of the year to rein in rising inflation remains to be seen.

However, the earlier-than-expected decision signals a strong economic recovery.

The country recorded 5 per cent growth for the first quarter of 2022 from a contraction of 0.5 per cent in the corresponding quarter, underpinned by improving domestic demand, better employment and easing coronavirus containment measures amid the transition to the endemic phase.

AmBank Research reckons that the early rate hike by BNM suggests it prefers to be in line with global central banks raising rates, and with inflation remaining a concern, the research house believes another one to two rate hikes will happen this year.

The OPR had stayed at 1.75 per cent since July 2020 before the hike, reaching a historically low level after the central bank slashed it by 125 basis points since the onset of the COVID-19 pandemic.


Cantillon Effect

Some economists believe that as an economy recovers, it would have excess money, an effect known as the Cantillon effect, in reference to the18th century economist Richard Cantillon. The Cantillon Theory refers to the demand that flows into an economy and where supply could not keep up with it, causing an increase in prices.

BNM has projected headline inflation to average between 2.2 per cent and 3.2 per cent this year, against 2.5 per cent in 2021.

“With the government over the past two years announcing a number of stimulus packages to assist the people during the pandemic, coupled with four times of Employees Provident Fund (EPF) withdrawals, to some degree yes, we are experiencing the effect,” Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid told Bernama.

He said that as more cash is still in hands of the general public, especially among the EPF members, consumer spending is expected to continue, especially since private consumption forms 58.8 per cent of the economy.

“The impact on the gross domestic economy (GDP) can be quite significant.

“But in the long term, EPF members' savings are affected quite negatively as they might miss the compounding effect from their savings in EPF,” he cautioned, saying that there will be less money spent in the future when EPF members retire.

As of April 14, EPF had received 5.3 million applications worth over RM40 billion under a special withdrawal facility.

According to the EPF, the top three reasons for the special withdrawal applications are a reduction in income or wage (24 per cent), assisting affected spouse or family members (23 per cent), and increasing sources of income (14 per cent).

Bumiputera Malays made up the bulk of applicants at 63 per cent, followed by the Chinese (12 per cent) and Indians (7 per cent) while the remaining 17 per cent were Sabah and Sarawak Bumiputera and non-Malaysians.

Mohd Afzanizam noted that expansionary monetary and fiscal policies have benefitted investors as stock markets respond favourably to news on economic intervention by the authorities.

“This was what happened to the stock market in 2020 when it rebounded forcefully after governments and central banks across the globe provided massive economic stimulus as most countries endured the strict lockdowns which severely affected their economy,” he continued. “However, the man on the street or the wage earners are still struggling to secure new jobs or having to contend with a reduction in income. In some sense, the net benefit from the economic stimulus seems to accrue more to the investing public.”


Inflation globally

As headline inflation stings across the globe, Moody’s Analytics made an analysis titled “The Global Outlook: The Inflation Era.”

It said higher inflation, aggressive policy normalisation, and supply-chain stress have weakened the global economic landscape. The research firm has revised downward its global gross domestic product (GDP) for 2022.

“Our baseline forecast is that inflation will peak for most economies around mid-year but will remain relatively elevated through 2023. Underlying this assumption is that oil prices have passed their peak but will remain elevated for the remainder of 2022, along with other commodity prices,” said senior Asia-Pacific analyst Katrina Ell, who authored the analysis.

Moody's noted that the world's largest economy, the United States, saw its consumer price index (CPI) just shy of a 40-year high in April at 8.3 per cent.

In Europe, the spike in energy and food costs is clear and broad across the region. The eurozone’s Harmonised Index of Consumer Prices inflation rate came in at 7.4 per cent year-on-year (y-o-y) in March, significantly stronger than the 5.9 per cent in February.

Germany’s inflation was 7.4 per cent y-o-y in April, its highest since unification, Holland’s headline CPI growth was at 9.6 per cent in April, and the United Kingdom’s CPI jumped to another record high of 7 per cent in March from 6.2 per cent in February.

Asia-Pacific has not escaped higher inflation too, according to Moody’s. India’s CPI growth is headed towards 8 per cent y-o-y in the June quarter as food and fuel prices skyrocket, while in Latin America, Brazil’s CPI growth hit 12.1 per cent in April, making a mockery of the central bank’s 3.5 per cent target.


Be reasonable and practical

Mohd Afzanizam advises people to be reasonable and practical at this point in time.

“This is where financial literacy would need to kick in, and I suppose the growing fintech companies that provide investment advice and platforms will need to penetrate the general society.

“We know that we are powerless to address the rising inflationary pressures, but perhaps, by investing we would have a better chance at outperforming the inflation,” he said.




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