at 1st we are only worried about the petrol hike's chain-reaction, now added with booster from our political unstable situation.... no investor will like political unstable country, lets see foreign investor will stay...

The rate hike in 1997/1998, IMO, is to further prevent trading of currencies, which was the main caused of the financial crisis. Leaving the rate as it is, or to reduce is, allows the market to flow, perhaps at a lower rate due to inflation. In this scenario, people would tend to choose what to buy, instead of buying everything, including things they dont need. Look at the recent inflation in US. Retail sales did not drop. However, sales shifted from luxury items to consumer staples (there is an increase in the latter).

I would agree with billytong. Rising the rate is a suicide attempt for BoM, as well as other banks. No doubt, initially it would lower the demand. However, due to poor credit market, the supply would eventually be affected as well. Perhaps to a halt. This in turn, would cause worse inflation, where the market chain is broken, and would take a longer time to recover.

When the buying stop, the business owner profit lowered, When profit lowered, there will be job lay off. People with no jobs will spend even less. Thus it will make the business sector turn from bad to worst = more lay off and repeat and repeat again.

IMO, the 1998 case was the BNM was trying to save the money from being taking out from Malaysia. Saving a big sell off of RM. It failed until Dr. M fix the rate @ 3.8 as controlled currency. (If he didnt do that we probably drop to 1USD vs RM5-8.00)

One word -> Inflation.

in 97, BNM raised interest rates to boast the significantly weakened RM and reduce funds outflow. Its diff from today's situation.

Central bank's conventional wisdom says :

If CPI > OPR ----> Raise rates
If CPI < OPR ----> hold or reduce rates.

and totally agree that rising rates significantly (anything > 75 bp) today will effectively kill off domestic spending and send the country to a prolonged slowdown. I hope that BNM learns a thing or 2 from latest FEDs move.

Just to add on the dallor-pegging done during the 1997 financial crisis. In order to maintain the 3.8 exchange rate, BoM will have to buy US$ with MY-RM. From year 2000, the amount of foreign reverse have increase tremendously to up 2004 to about US$71 Billion. However, we do need to remember, in order to "buy" US$, we need a huge amount of Ringgit. Inflation by defination, is the over supply of a currency. In this case, the over supply of Ringgit, where Bank Negara had to free print Ringgit in order to "buy" the Dallor. And it is for this reason, we could observe the ever rocketing CPI, housings, etc. Ofcourse, we're not alone. China has about US$600 Billion on hand now, that's a much greater problem..

Read here for a more detail explanation.

Anyway, CPI for 2008/2007 is at 2.9%/3.0% for peninsular and sabah/sarawak respectively (2005 base), while the OPR is maintained at 3.5%. While there was an increase in unemployment rate to 3.2%, it's still being considered "OK" as it's still well below the 5% red light.

IMO, perhaps the bank raising HR rate is at an attemp to avoid bad loans?

it's hardly to said that BLR rate can be lower in future cos it is depend on BNM decision...actually if u compare to last time, the BLR rate now is a slightly lower...so it will benefit people who plan to buy house..

The amount of foreign currency reserves come from trade surplus and money inflow.

Malaysia or country doesn't buy USD for their foreign reserves aka you don't print money purposely to buy other currency in open market to put in reserves. Generally, foreign Reserves come from trade surplus.

Eg.
Malaysia is an export orientated country. So locally produced goods, palm oil, oil etc, are exported to all over the world. So company in Malaysia will receive money in the form of USD, so there are foreign currency inflow to Malaysia. So if company wish to convert to RM, then circulation printed money of BNM will be converted to USD. Then BNM will keep those USD, that's where foreign currency reserves come from. You don't purposely print money to buy USD in the open market, it will cause massive depreciation of your currency. Every central banks are very careful about printing money or provide money supply, as it has significant impact on your currency value. Generally they only print or provide money supply according to the economy needs as mentioned earlier, RM being printed because of demand for RM from USD. Yes, it will flood the financial system with more liqudity, as mentioned in your post or linked, but this come from demand for money in the first place.

Eg. businessman that received money from export businesses then take those USD to BNM to convert to RM, how can BNM say no? So, BNM needs to give the businessman RM and keep those USD. So eventually there become more RM in the financial market, that's why KLIBOR rate stay at relative low level (low FD rate), because the financial is full of money around.

Whenever you see country with high trade surplus, then they definitely have huge foreign reserves currency. Japan, China, HK all are having huge trade surplus with US.

Malaysia has low foreign currency reserves prior before 1997 crisis because at that time, Malaysia economy is in red hot form, growing robustly, so local demand is strong, and demand for import goods, machinery is high, so there was trade deficit at that time. But since 1997 crisis, domestic economy no longer as same as previously, so demand of import shrink but export due to cheaper RM (after depreciation) continue to grow, so the trade surplus become bigger and bigger so does foreign currency reserves.

Also, another point to make, current inflation situation is not mainly demand driven by domestic Malaysia demand. Domestic demand is not as strong as people taught. It is mostly demand driven by external factors, although Malaysia economy is 'full of money' also, but this is not the major current massive inflationary factor.
Main culprit current inflation situation is from China demand especially on commodities side. Also Fed whom provide cheap money around the world, which lead to US subprime meltdown as well.

Just my opinion.

This post has been edited by cherroy: Jun 21 2008, 10:43 PM

hm...when a businessman brings in US$, no doubt, BNM will have to give them back as RM. In any way round, BNM is still using RM to buy US$. From 1998 to the early 2000s, it would be rather difficult, if not impossible, to gather RM269.8 billion in cash, in addition to the slower market movement during that period. Just my view..

Japan, China, HK, and also Taiwan is experiencing high inflation as well.

Anyway, thanks for the info cherroy.

i just heard that BLR will increase to 7%....coz i just wanna apply loan base on BLR then they said that it might be increase, so they offering KLIBOR type loan...

yeah.. heard too , BLR will increase to 7.2%

Sorry,..... heard from where please ?

heard from LYN ?

standard chartered loan personnel..i had already sent my application few day later he call me said like that(because he just attend a meeting)...so i switch lor...

This post has been edited by razorzx66: Jul 1 2008, 01:56 PM

heard from bankers looo...

Bankers don't decide how much BLR will be increased, the bank personels can only speculate. BNM decide how many points they can increase.

i think interest up > ringgit strengthen > import cost down > price down

i think that's the purpose

IMO, Malaysia has to maintain a +ve trade balance. by means, export > import. Appreciating the Ringgit could reduce exports, especially due to recent hike in inflation and oil price. there has already been a market shock. another one will not do any good. Depreciating the Ringgit doesnt necessarily means bad economy. As long as the Ringgit remains flowing through the market, it should be good.

just my view

Banker here from loan processing, yes the news is true but today just got another news Bank Negara decided not going to increase

999% riot if it reach 7.5

they plan to increase till 8% btw

Good, we might just follow the footsteps of the US financial slowdown

I still think the BNM should not touch the interest rate.

Come on? Since when poor people have most of their money in bank? They probably use to pay loans & their expenses etc leaving nothing left to save.

having higher BLR only benefit the rich who have huge saving in bank, and the poor wont be able to get the FD interest benefit to counter the inflation.