Monetary Policy Practice

7/30/2019 Monetary Policy Practice

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PRACTICE

IN

MALAYSIA

Presenter


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Preface . DEFINITION OF MONETPOLICY

The actions of a central bank,currency board or other regulatorycommittee that determine the sizeand rate of growth of the moneysupply, which in turn affects interestrates. Monetary policy is maintained

through actions such as increasingthe interest rate, or changing theamount of money banks need tokeep in the vault (bank reserves).


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Macroeconomic Effects GENERAL

The global financial crisis of 2008-its epic center in the United Statebrought enormous ramifications fworld economy.

Hence, although the Malaysian ecwas insulated from the direct effefinancial exposure because the ne

derivatives were not allowed intocountry, the global financial crisisdoubt on the Governments planscollapse in exports and a slowdowforeign direct investment (FDI).


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Whereas the Governmtargeted an annual avGDP growth rate of 4.the period 2006-2010International Moneta(IMF) forecasted Mala

GDP per capita to con5.1% in 2009 and -0.42010.


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Macroeconomic Effects -GDP andComponents-

The contagion from a crash in globalaggregate demand on the Malaysianeconomy can be seen from a numberof sectors and markets. The overallGDP growth rate of Malaysia sloweddown to 0.1% in the last quarter of

2008 and contracted by -6.2% in thefirst quarter of 2009 before fallingfurther by -3.9% in the second quarterof the year.


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Malaysias economy has cleentered a recession followidecline in GDP over the firsquarters of 2009. The contrexpected to further reduceMalaysias capacity to achie

2020 per capita income ofUS$15,341 under the visionprogramme. Malaysia is alrexpected to record a 26% sGDP from its 2020 vision pa


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Government Responses: Mitigating Negative Effects

Mitigating theNegative Effects

Monetary Policy Financial Policy

The Governments approach to the present c

to that of the 1997-98 Asian financial crisis, w

public sector taking a dominant role in revivi

economy. The difference lies in the size of thpackages due to the drop in export demand.


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Government Responses- MonetaryPolicy-

The major challenge Malaysia hadto contend with was thetransmission of the globalfinancial crisis from the monetaryto the real sector of the worldsmajor economies, which hadcaused exports to collapse.

Another important challenge waspresented by the sharp decline inFDI inflows that furtherconstrained aggregate demandand the private sector.


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Rising global commodity and food prices

built up inflationary expectations in early

2008. Inflation peaked in July and August

that year and, as a result, headline inflation

recorded an increase of 8.5%.

The removal of fuel subsidies in

June 2008 further pushed up

domestic fuel price by 40.4%.

Even with rising inflationary pressures, BNM kept

interest rates unchanged at 3.5% until late-Novem

2008. The interest rate had been maintained at th

level since 2006.


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* The Bank was reluctant to increase interest rates because it hadnot yet seen the secondary effect of price increases being

transmitted into the system. Moreover, it feared that any interest

rate increase would push inflation higher.

The lowering of the Overnight Policy R

November 2008 by 25 basis points to 3

January and February 2009 by 75 and 5points respectively to the current level

done only after the full impact of the g

began to be felt in Malaysia By that tim

inflationary pressures had dissipated w

collapse of oil and other commodity pr


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expansionary monetary policywas to support the fiscalstimulus introduced earlier. Theinterest rate reduction wasaccompanied by a lowering ofthe Statutory ReserveRequirement (SRR) to 3.5% to

reduce the cost ofintermediation.


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The easing of interest rates does not seemto have been particularly successful in

maintaining the velocity of money supply

(as measured by M2) at the 2008 level

From July 2008 to January 2009, M2 grew by

more than 10% per month. Since February

2009, however, the M2 monthly growth rate

has moderated substantially. Interest rate

reductions had a positive influence on the

domestic private debt securities market.

Between July and December 2008, the value of

new private debt securities issued had

dropped, with the month of November

recording the worst slump.


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*However, since March 2009, the value ofbond issues almost doubled compared with t

preceding six-month period


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The domestic banking sector was strengthened a

1997-1998 crisis and, being more resilient now, is

for further liberalisation. To support this effort, th

Government introduced a deposit insurance sche

Perbadanan Insuran Deposit Malaysia (PIDM). In

countries in the region introduced guarantees for

deposits to allay fears of the collapse of financial

and to discourage capital outflows. Malaysia expe

large capital outflows from March until Septembe


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The lending activities of commercia

lethargic despite lower OPR, loweradditional funds available for loans

Loan growth could have benefitedearlier interest rate reductions as sThe decline in loan growth began iand reached a serious depth betwe2008 and January 2009. Loans begain June 2009, with the loan-deposicommercial banks improving from

to 77.35 in July 2009.


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Between August 2008 andJanuary 2009, BNM introducedthree additional financingincentives and schemes forSMEs. The Assistance Facilityaims to help viable SMEs with

temporary cash flow problemsby offering loans with interestrates as low as 4% per annum.

In November 2008, RM200 millio

channeled to the Micro Enterprise

can be accessed by SMEs through participating financial institutions

normal credit approval process. A

SME Assistance Guarantee Schem

introduced in January 2009 with a

RM2 billion for SME financing.


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CONCLUSION

The improving prospects of the Malaysian economy since thof 2009 are partly due to the upturn in the global economy. rapidly changing global economy, it is important that Malay

maintains strong fundamentals and a robust financial sector

Malaysian Government should be prepared for possible meprevent sharp price rises, especially for essential goods. Like

monitoring of strategic global developments that can affectsignificantly will be crucial in this rapidly changing environm

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Monetary Policy Practice