LETTER | Low interest rate or inflation?

LETTER | Former finance minister Lim Guan Eng seemed obsessed with maintaining the current interest rate, citing the adverse impacts, particularly on borrowers and small businesses if interests are raised further. 

Inflation is worldwide, not just in Malaysia. The main reason is the unfettered creation of money during the Covid-19 pandemic, when billions were created from borrowing by the national treasuries from the central banks.

This is what most governments do – creating money but not wealth. The high inflation that is prevailing now is frankly quite predictable given that “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” (Milton Friedman)

While we try to suppress interest rates to help those who are highly geared, the implication is not as simple as we think. Lower interest rates can help loan repayments but high inflation will affect everyone, including those who have not taken any loans. Their income and savings, particularly among pensioners, are “inflated” away with not much left for them to survive on.

Maintaining lower interest rates also encourages consumption, which further escalates inflation. Besides, maintaining lower interest rates vis-à-vis regional currencies may depreciate the ringgit further and thus further fuel imported inflation.

There is no “one solution” to managing an economy. Ultimately, it always involves trade-offs and due considerations that are aimed at benefiting as many people as possible.

As I see it, allowing high inflation to persist is unsustainable. It reduces the value of disposable income and it erodes the savings of individuals. Why must people with little or no loans subsidise those who are highly geared?

In fact, if we look at the global economy today, the policies are also in favour of the “adventurous” and punish the prudent and the savers.

A little knowledge is a dangerous thing. Some said in times of recession, the Keynesian doctrine should be applied, ie the government must spend as much as it can to create jobs and economic activities, including asking workers to dig up a hole and fill it right back.

This, to me, is Keynesian theory misconstrued. Even if the government wishes to spend more, it must engage in productive spending that leads to the higher productive capacity of the economy, without which government spending (especially from borrowed funds) would lead to higher inflation.

It is the same with money creation. With the advent of fiat money, almost every country can create money at will. The creation of money without the corresponding increase in GDP, especially during the Covid-19 pandemic, is obviously inflationary.

Sometimes I wonder why are we surprised that there is worldwide inflation post-pandemic. Of course, the war in Ukraine has further exacerbated the situation.

Between keeping the interest rate low and increasing it, I think the professionals in Bank Negara Malaysia must strike a balance. It is not just favouring those who are highly geared.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.