Tuesday, July 15, 2008

Inflation and stagflation rather than interest rate hike worries financial market

Many analysts do not expect Bank Negara to raise interest rates at its July 25 monetary policy meeting and see the lacklustre bond market as affected more by the issue of inflation and windfall tax. Analysts are not expecting a rise in overnight policy rate (OPR, now at 3.5%) on July 25, but consumer price index numbers (an indicator of inflation) from June to December are expected to average at 7% to 8%. This blog had predicted an 8% CPI on 24 June 2008, against Bank Negara's forecast of 5%, read here.
There are indications that Bank Negara is taking the correct view that a rise in interest rates will have adverse implications of dampening consumption. More analysts are now joining the bandwagon to say that there is a real risk of stagflation in Malaysia. So a rise in interest rates will impact adversely on consumption and, therefore, economic growth.
A hike in interest rates may be useful as a tool to control inflation in an overheating economy, but that certainly isn't the case in the present environment. Read Star Online's report, Inflation rather than rate hike worries bond market.

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