No Rates Increase For Now

Last Friday, Malaysia's Central Bank decided to put interest rates on hold, thereby squashing speculations that rates might be raised by 25 basis point, to counter the recently published high inflation of 7.7% experienced in June. The latest action by the Central Bank was taken in lieu of the country's slowing economy and therefore meant to avoid putting further pressure on growth and consumer spending, despite inflation being the highest in 26 years! The argument against inflation is that there is a likelihood it may ease going forward given the slowing economy and consumer spending.

From my observations, many analysts (some local and mostly foreign) had taken this piece of action negatively. They perceive that the country is at risk of posting even higher inflation going forward, given the Central Bank's move to retain interest rates. They felt that Malaysia should have raised rates just like many of the other neighbouring countries did! (Herd's mentality, perhaps?) As of Monday, Ringgit was under heavy selling pressure as a result.

Contrary to expectations, the stock market reacted positively as it went up 1.1% on Monday.

One thing is certain. A higher interest rate environment will deter spending on businesses and consumer. Moreover, higher financing cost does not bode well for everyone. This is certainly not good for the economy and the people considering the already slowing growth caused by global credit crisis and high inflation.

In my view, it may not be an entirely bad idea to put on hold certain actions until events are more certain or crystalized.

For those who intend to secure new loans, it may be wise to secure it now and go for fixed rates scheme, particularly for those who do not like to stomach fluctuating cost.

What do you think? Should the Central Bank raise interest rates?