Malaysia’s Zeti Comments on Inflation, Monetary Policy, Tapering

Zeti Akhtar Aziz, Malaysia’s central bank governor, comments on inflation, interest rates and financial imbalances. She made these comments in an interview in Washington on April 12.

On inflation:

“We know the source of the inflation. It is not induced from strong demand.”

Demand has “actually moderated slightly from the highs of 2011 and 2012.”

For private-sector investment, “we have had five consecutive years of double-digit growth in investment.”

“So over and above this, we also have infrastructure investment and so on by the government. When you have investment, this is expanding the capacity of the economy. When you expand the capacity and you have moderating demand, consumption demand, that doesn’t produce an inflationary condition.

‘‘Wage growth has also moderated in this environment. So what is causing inflation is actually price adjustments by the government.

‘‘We are monitoring closely whether there are second-round effects, and look at whether wages have increases that are not commensurate with productivity, but we don’t see that yet. We don’t see these second-round effects emerging.

‘‘Next year, the government has announced that it will introduce a value-added tax, GST. And that will cause the prices to increase, but after that, we expect it in 2016, prices to come back down to about 3 percent.’’

The projection is that ‘‘it would rise somewhat -- this year it’s in the range of 3 to 4 percent, and that next year, it would probably increase a little bit further but it would come down back to 3 percent by 2016.’’

Rate outlook:

‘‘The outlook for interest rates is based on -- the first is inflation, inflationary conditions. We will monitor very closely whether there are second-round effects. Right now, we’re not seeing it.

‘‘The second thing is, we look at risks to growth and what is going to happen to growth because for us, we look to remain on a steady growth path.’’

Also, ‘‘we look for the risk to the build-up of destabilizing financial imbalances.’’

On macro-prudential measures:

‘‘We’ve implemented those measures. They’re very effective and we implemented it gradually and so there’s been a slowing down of the growth of household debt and there’s been a slowing down of increase in property prices.”

Malaysia does this gradually to avoid “a severe correction or an over-adjustment by the household sector.”

On imbalances risk:

“It is necessary not to persist a prolonged period of interest rates that are too low.”

“At the point now, it’s not significant.”

Malaysian policy makers should “make an assessment and be anticipatory so we will continue to monitor that. These are the three major considerations in interest-rate policy that we would look at, the outlook for inflation, the outlook for growth, and we would intensify our surveillance on the buildup of destabilizing imbalances.”

“The situation is very dynamic.

‘‘We would look at very closely these developments going forward and we will base our interest-rate policy on the forward-looking assessments. In other words, you don’t look at the current environment. You look at what your assessment is of the future.’’

Fed tapering impact:

‘‘We fared better than we expected because there was significant volatility in capital flows. But our markets remained fairly orderly and we were able to intermediate these flows and therefore there was no disruption in credit flows and there was generally orderly conditions both in the money market and in the foreign-exchange market as well. And it did not have an effect on our real economy because credit flows were not disrupted and the opportunity for businesses to raise financing from the financial markets was also not disrupted.’’

On trend of outflows:

Outflows from emerging markets may continue ‘‘I suppose for quite a while because although tapering might be concluded by the end of this year, the markets will still take positions based on the prospect of rates being adjusted.’’

‘‘It will continue for a while until the rates adjustment takes place and the ability of those emerging markets to sort of ride out this period even if it extends for another 12 months depends on the extent that their markets are developed and the soundness of their financial institutions.

‘‘In the case of Malaysia, we have one of the more developed bond markets and capital market in general, and we also have buffers of strong reserve levels and we also have strengthened our financial institutions and in particular, we have our own institutional investors and these are very strong institutions like the provident fund and some trust funds and equity funds. They step in when there’s a sell-off in the bond market. So actually we didn’t see our yields increase very much. I believe between about 50-60 basis points which is a lot less than some countries experienced, like 200 basis points’ adjustment in their bond yields.’’

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