Economists sceptical Malaysia experiencing disinflation

PETALING JAYA: Bank Negara Malaysia (BNM) beat the US Federal Reserve (Fed) to the punch when it paused its rate hike cycle on Jan 20 on the back of apparent easing of inflationary pressures in the Malaysian economy.

On Feb 1, the Fed started its own easing cycle by raising rates by just 25 basis points, with its chairman, Jerome Powell, saying the US economy was in the “early stages of a disinflationary process”.

The Fed’s latest hike brings the federal funds rate to a range of 4.5% to 4.75%, compared with BNM’s overnight policy rate (OPR) at 2.75%.

So, is Malaysia also experiencing “disinflation” that not only allows BNM to pause its rate hike cycle but perhaps also to reverse it?

Several economists FMT Business talked to are not convinced Malaysia has beaten off the inflation monster that has threatened the economy over the past year.

Disinflation? Not so fast

It is instructive to first define what is disinflation. According to Investopedia, disinflation is a temporary slowing of the pace of price inflation.

Unlike inflation and deflation, which refer to the direction of prices, disinflation refers to the rate of change in the rate of inflation. A healthy amount of disinflation is necessary since it prevents the economy from overheating, it adds.

Inflation in Malaysia peaked at 4.7% in August last year, easing to 4% in October and November, and dropping to 3.8% in December, according to the department of statistics Malaysia (DOSM).

Monash University Malaysia economics professor Niaz Asadullah noted that while prices have risen, Malaysia is nowhere near double-digit inflation like in some high-income nations.

“The last time we saw disinflationary trends was in the early months of the Covid-19 pandemic when trade, businesses and customer demands were disrupted.

“Considering our current level of inflation, post-pandemic economic resumption and recovery trends, I do not expect a disinflationary trend yet, not at least in the immediate future,” he said.

Niaz said according to past trends, BNM would likely follow suit with the Fed’s rate hikes, but this would prove to be politically unpopular for the new government.

He expects the central bank to be less reactive, whereby the OPR would be adjusted gradually to 3% by year-end.

Universiti Malaya economics professor Nazari Ismail said Malaysians will have to wait for DOSM to confirm if disinflation has begun here. “But I have a feeling it hasn’t,” he said.

He pointed out that such a trend is not necessarily a good sign as disinflation can turn into deflation or worse, a recession, when demand plunges.

“This is not good news for exporters and many firms may end up in trouble, and unemployment may increase,” Nazari said.

Center for Market Education CEO Carmelo Ferlito said Malaysia is not experiencing deflationary tendencies but rather “a normalisation of inflation”.

“However, the actual scale of inflation in Malaysia is somehow covered by subsidies and price controls,” he said.

Ferlito said BNM, by keeping its OPR unchanged, is moving more or less in the same direction as the US Fed.

“I believe that both central banks trust that inflationary pressures have moderated, and at the same time, they wish to avoid pushing in the direction of contractionary effects,” he said.

BNM made the right call?

Malaysia University of Science and Technology (MUST) research and innovation provost Geoffrey Williams believes BNM has made the right call in pausing interest rates.

“Interest rates are around the right level as prospects for 2023 are more stable, and there is policy room across multiple options,” he said.

Williams noted that the US and Europe have essentially only one tool in its economic policy, that is interest rates. “In contrast, Malaysia has other measures it can utilise from its toolbox such as price controls, subsidies, or fiscal policy.”

Pacific Research Center of Malaysia principal adviser Oh Ei Sun opined that BNM will have to follow the Fed in hiking rates. “If not, there will be outflow of capital from foreign and domestic sources to the US markets, to enjoy the higher interest rates there.”

However, this would mean borrowing costs will be higher as businesses and ordinary folk would pay more for loans. This, he said, would have a dampening effect on the economy.

However, OIh noted that BNM’s reason for its OPR pause was that it wanted more economic growth, with a ready source of loans with lower rates available for businesses to expand.

“Rate adjustment is not a science but an art, it is always a balancing act,” he said.

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