Quantitative Easing

Forehand to hold OPR

THE The decision of the Monetary Policy Committee (MPC) of Bank Negara on January 20 to maintain the overnight rate (OPR) at 1.75% (in continuity with its decision of November 3, 2021) is the right policy direction. However, Bank Negara could have gone further by lowering the OPR to 1.5%, with a view to keeping it for the foreseeable future.

The political backdrop/backdrop is, of course, the heightened inflationary pressures of Q4 2021, which persisted into early 2022, and the momentum is likely to continue although it should eventually dissipate.

According to the Governor of Bank Negara, Tan Sri Nor Shamsiah Mohd Yunus, for 2021, the average headline inflation stood at 2.5%, compared to a low base of -1.2% in 2020, while inflation inflation averaged 0.7%, compared to 1.1% in 2020. The consumer price index (CPI) was 3.2% in December 2021 with core inflation at 1.1% and inflation excluding fuel at 2.2%.

Looking ahead, economists Geoffrey Williams and Paulo Cassadio have forecast that average headline inflation will be around 2% for 2022, while core inflation will average around 1.6%.

The spike in food prices manifested in November 2021, primarily in the form of vegetable prices. Before that, there was the issue of rising chicken feed prices, with particular reference to corn and soybean meal since the second quarter of 2021.

According to an industry insider from the Federation of Malaysian Livestock Associations, “maize accounts for around 50% of feed costs and soybean meal around 25%. Corn and soy flours are products entirely imported from Argentina [Pacific route] and Brazil [Atlantic route]and since October 2020, the cost of maize has risen by more than 60%, while the prices of soybean meal have increased by more than 40%” (“Poultry players protest against the extension of the price control, Peripheral markets, January 18). These would be imported via shipping companies registered in countries such as Panama and the Dominican Republic, which do not regulate shipping prices and therefore cartel pricing (price gouging) – as has recognized and brought to the fore US President Joe Biden’s administration.

In addition to this, the Panama Canal Authority increased the Canal Transit Fees which came into effect on June 1, 2021. The increase represented:

> An increase in minimum cost per transit booking of USD 20,000 (RM 83,720) (up 57%); as well as

> maximum cost increase of $58,500 (167% increase), etc.

For a detailed picture, see the report by rating agency and analysis consultancy SP Global (“Panama Canal booking tariff increase postponed to June: ACP”).

Our government should conceptualize and implement its intervention accordingly – where the most critical part would be our freight forwarders and importers in the supply chain – as part of efforts to control and rein in inflationary pressures. And this is what is meant by “transient” inflation, i.e. not short-lived as such but dependent on the gradual removal of supply chain bottlenecks and supply-side shocks.

The cost-push nature of (this) inflation is recognized by central banks in developed economies, notwithstanding announcements and policy measures.

In the United States, Federal Reserve Chairman Jerome Powell has “committed” to raising the federal funds rate by March. This would align with the quantitative easing (QE) program reduction schedule of bond buying which will also end in March. Since the Great Financial Crisis, the decline in the federal funds rate has been synchronized with the “downward twist” of long-term yields in the term structure.

However, a significant rise in the interest rate is highly unlikely as it could lead to market turmoil and higher Treasury yields with “pass-through” implications in terms of market liquidity. The banks will find it difficult to sell the bonds on the secondary markets because they will sell at a loss (remember that the return is inversely proportional to the principal).

Whatever the percentage, the irony is that it will not “cure” inflation – with higher borrowing costs (higher interest rates accompanied by quantitative tightening) for the public and non-public sectors. public (private and households). At the same time, via the futures price channel, i.e. the pricing of future deliveries of goods anchored on the interest rate, will also increase. For the administration, “hawks” may be pushing for national debt reduction/repayment, which could create a “blockage” in Congress and derail Biden’s infrastructure spending under the Build Back Better plan.

As far as the Bank of England is concerned, the cash rate was recently increased to just 0.5% from 0.1%, which is insignificant and can be seen as a token (political) gesture. Additionally, Governor Andrew Bailey has warned against wage increases. This definitely reflects the idea that inflation is a cost-push phenomenon and that monetary policy cannot be seen as the be-all and end-all.

The European Central Bank (ECB) has generally been associated with “inflation aversion”, shaped by the influence of monetarism and the German phobia of hyperinflation that occurred during the Weimar Republic in the aftermath of World War I, which was only cured by the introduction of a substitute currency called the Rentenmark. Again, the Weimar hyperinflation had nothing to do with accommodative monetary policy as Germany scrambled to meet its foreign currency repatriation commitments and its industrial heartland in the Ruhr fell under occupation. French, which affected the price level.

It is true that the Rentenmark, which has brought hyperinflation under control, has been fixed in supply because it is linked to the value of agricultural and industrial land. But this only served to restructure the price (quality) of the currency itself.

Fast forward, ECB President Christine Lagarde reportedly said that the “[d]Despite the current surge in inflation, the medium-term inflation outlook remains subdued,” although it now “recognizes” that the ECB was “very close” to achieving its inflation target.

In a Q&A on Twitter (February 10), ECB Executive Board Member Isabel Schnabel made three main points:

1. “Inflation has increased mainly due to energy prices that we [i.e. the ECB] cannot directly affect”.

2. “Currently, longer-term inflation expectations remain well anchored.”

3. “Transient” shocks generally do not require [monetary] political action”.

Despite this, the conventional wisdom remains that fighting inflation requires raising the interest rate. For example, the HSBC Asian Outlook 2022 forecasts that Bank Negara is likely to increase the OPR by 100 basis points (1%) between 2022 and 2023 due to the tightening labor market in Malaysia and the gradual upward movement of the underlying inflation.

However, as MARC (Malaysian Rating Corporation Berhad) Chief Economist Firdaos Rosli points out, “…increasing interest rates will further increase borrowing costs and input prices amid of the slowdown in the economy. Therefore, prices are likely to rise rather than fall.”

Renowned economist, Professor Jomo Kwame Sundaram, also denounced any calls for an OPR hike in his joint paper, “Paranoia inflation threatens recovery” (February 2).

The following two factors should force a rethink of raising interest rates.

I. Minimum wage increase

Recently, the Minister of Human Resources, Mr. Saravanan, indicated that the increase in the minimum wage to RM1,500 per month should be implemented before the end of 2022.

EMIR Research calls for the minimum wage to be implemented at the earliest in the second half of 2023 – with wide consultation of stakeholders such as Federation of Malaysian Employers, Federation of Malaysian Manufacturers, Association of Small and Medium Enterprises , chambers of commerce, etc. .

II. Ongoing Supply-Side Problems

Continued government price controls (as a precondition) must be systematically and consistently accompanied by subsidies and other forms of financial/fiscal measures. The recent Cabinet decision to subsidize 60 sen per kg for chicken and 5 sen per egg for poultry farmers is the right policy direction.

The most critical part is the shipping and freight forwarding charges. The government must act quickly and intervene by directly or indirectly using its bulk purchasing capacity and the removal of caps and so on.

Other measures include:

a) Form a consortium that includes Government Linked Companies (GLCs) (shipping) to import in bulk to reduce and cushion the impact of excessive or skyrocketing shipping costs;

b) The formation of a Special Purpose Vehicle (SPV) to import certain categories of goods, where the government bears 50%-70% of the shipping costs which will be “compensated” on the basis of cost sharing. profits in agreement with long-term shippers. -determined time ; and

c) Form a GLC to act as a (non-profit) middleman – i.e. secondary importer (post shipment) – where costs will not be passed on to the next step in the supply chain supply (for example, wholesale or retail).

In addition, the government should set up an SPV with the aim of setting up inflation-linked swaps (ILS). The SPV would also simultaneously be responsible for projecting and forecasting future movements in inflation. The ILS should be exchanged on Bursa.

In short, monetary policy should be accommodative of fiscal policy (and not just economic conditions) by keeping the OPR at the current level, or even lowering it to 1.5%. And further develop measures under its “toolbox” and policy levers to synchronize monetary and fiscal policies.

Jason Loh Seong Wei and Tan Tze Yong are part of the research team at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.
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