Bank Negara (Central Bank) Malaysia has decided to maintain the overnight policy rate (OPR) at 3.50% today defying the pressure to raise it to fight the 27-year high inflation of 8.5 percent recorded in July. The central bank announced that domestic inflation was expected to remain high for the remaining part of 2008 and going into early 2009 before moderating substantially in the second half. Right! As if we do not already know that.
The 3.50 percent level has been unchanged since Apr 2006 but the bank’s governor Zeti Akhtar Aziz said she had not bowed to pressure (from ruling government) in setting rates ahead of a by-election on Tuesday in which opposition de-facto leader Anwar Ibrahim is expected to score a major victory which could put him on a path to toppling the government. In her justification, Zeti, who rumored to have put in her resignation, said the decision was based on the fact that inflation has not reaches its dangerous level yet *huh?*.
While many investors expect the central bank to raise interest rate as that was the standard way or normal step to take in order to cool off inflation, one has to understand that the current spiral inflation situation is not due to hot money chasing for goods but rather the after-effect of the recent 41 percent fuel hike. In fact people are not buying unnecessarily. Just how bad is the situation? The 8th Mar 2008 general election was the best evidence that people were very unhappy with the country’s economy and if tomorrow’s by-election result shows increase in majority for Anwar, it’ll be another piece of proof that people are still not happy with the way the economic is being handled.
The stock market could just slide further and test the 1,000 level if Anwar could beat his wife’s huge majority – not an easy task considering the by-election can easily qualified as one of the dirtiest ever. Nevertheless the local currency, ringgit, can expect its value to depreciate further with the latest decision by the central bank. But who’s complaining when it did not offer any benefits to the people on the street when the ringgit hit below 3.2 to a dollar recently? Going by the rate the ringgit tumbles, it would be interesting to see if it could breach the 3.40 to a dollar after which it could depreciate further to 3.50.
HSBC Holdings Plc. which predicted that the ringgit could weaken to 3.50 per dollar end of 2008 also believed the currency will not be able to flex its muscle until at least 2010 due to falling commodity prices and rising political tension. RBS, the U.K.’s second-biggest bank, also predicted ringgit could be flushing down the toilet and will weaken to 3.50 by end of 2009. Gone were the days when a weaker ringgit benefited the country in terms of cheaper labour because China has taken that place. RBS report also touches on the possible of defection to opposition camp should Anwar wins big tomorrow as PM Abdullah Badawi could be sent into panic mode. What an opportunity to short Malaysia ringgit!
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August 25th, 2008 by financetwitter
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