Monday, July 14, 2008

Stagflation, Inflation and Interest Rates

Is stagflation inevitable for Malaysia? Some time ago, this blog had warned about stagflation, see An economic agenda to consider. The concern over stagflation is now gaining traction. See for instance the Star Online report on the challenges facing the construction and housing sector, Strategies to survive the property slowdown.
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Stagflation is a portmanteau word that describes an economic illness wherein inflation combined with stagnation lock a society into slow-to-negative economic growth and rising unemployment, invariably including recession.
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Need for coordinated fiscal and monetary policies
What worries me is whether the M'sian economic strategists are able to craft a harmonious set of monetary and fiscal policies to combat this likely phenomenon. For example, there is evidence that Bank Negara may introduce an interest rate hike or a series of graduated interest rate hikes to control inflationary pressures. See this Star Online report, Can interest rate hike help fight inflation?
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But, interest rate hikes affect lending and savings which are useful if there is an asset inflation such as property booms. Granted that in the preceding years, Malaysia has seen bullish property prices.
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However, we are now faced with consumer price inflation in the form of higher fuel prices and food prices. Such a phenomenon is immune to interest rate hikes.
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Furthermore, there is a good chance that interest rate hikes will further dampen economic growth at a time when the government itself is in the mood for fiscal pump-priming to keep economic growth from contracting to below 5.5% of GDP.
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The government economic planners - meaning Bank Negara and the Economic Planning Unit, in particular - need to seriously look at coordinating a proper menu of policies and actions.

1 comment:

ben said...

It's a catch 22 situation, isn't it ? Our inflation is actually imported inflation vs consumption inflation. If we don't increase interest rate then the Ringgit will depreciate further which will in turn stoke inflation. On other hand, aggressively increasing the rate may cause the economy into a recession.

If we analyse carefully, what is the sudden cause of spike in inflation. Isn't it the historical fuel hike ? Apa somebody (definitely not an economist) salah tekan, so now it is fire fighting.

I would discount EPU's input since it's not more than a rubberstamp to make the Rakyats poorer and enrich a few cronies and the cause of all the pain that we're suffering with privatisation. We need NEAC (rename it as Anti-inflation Committee?) to work round the clock to come up with a quick solution asap!