Do we need a rate cut following the September 18 footstep of the Federal Reserve to properly manage the Malaysian economy from the monetary side of the equation?
The answer is possibly no. While the US is the largest trading partner for Malaysia, the state of the US economy is not the only factors that need to be considered in managing the local economy.
The slowdown of the US economy, partly signaled by the slowdown in demand for electronics as well as the subprime mortgage crisis affect trade between Malaysia and the US adversely. The effect however is being mitigated by large government spending and as mentioned earlier by Bank Negara, robust domestic consumption and investment. While I personally expect a slowdown in the Malaysian economy, I have a feeling that the state of our economy is healthier than the one suggested by those in the broking business. For those following the security industry, suddenly, they have become more pessimistic than me!
Anyway, with a respectable performance so far, there is limited need to cut rate in order to boost the economy. We need not appeal to the short time horizon that any financial indicator proffers.
At the same time, with the rate cut by the Federal Reserve, it might actually spur growth for the Malaysian economy. First of all, it might improve the US economy which in turn encourages trade between the two countries though Malaysian export will be more expensive compared to US goods; US export will be cheaper compared to Malaysian goods. Secondly, with the reduced interest rate differential between that in the US and Malaysia, more funds could actually flow into Malaysia. Both, sooner or later would strengthen the Malaysian ringgit against the US dollar as capital flows into Malaysia from the US.
So, against, less reason to cut the Malaysian rate the next time the Bank Negara Monetary Policy Committee sits in October next month.
On the other side, inflation seems to be well contained. Hovering around 2%, it might give a rate cut a chance but with the upcoming festive season as well as increasing crude oil price, it is not wise to bet for a rate cut.
If I were a voting member within the MPC and the environment stays practically the same, I would vote like how the MPC had voted earlier; do nothing to let the rate stays at 3.50%.
