An argument goes that rate hike will not address inflationary pressure in Malaysia.

It is not as effective against cost-push inflation as it is against demand-pull inflation. And right now, the economy is experiencing cost-push inflation. More importantly, the push is coming from abroad. It is practically exogenous, discounting the liberalization exercise (which itself originates from exogenous pressure applied on government finance).

Hike the rate and price increase will not slow down by much. Local demand is not big enough to slow down the advance of the prices powered mostly by the larger foreign demand.

So, there is little need to increase the rate.

If the mysterious author at Economics Malaysia is correct, then rate hike might be more effective than proponents of the cost-push narrative are willing to accept. The author believes that the economy is already running at its full capacity. He believes the unemployment rate basically is bottoming out and is unlikely to go down any further in a significant manner.[1]

I am will not go into the numbers but the logic is sound.

Because it is sounds, it suggests that demand-push inflation making its round, thus making the exogenous cost-push story line less weight in the determination of monetary policy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — I’d still take this as a signal that the economy is at full capacity, as we’re looking at near historical lows in the unemployment rate. While GDP growth likely softened in 2Q 2011, there’s been little impact on jobs so far — June’s numbers however may show a different story. [Hishamh. May 2011 Employment Report: Softly, Softly. Economics Malaysia. July 25 2011]

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