Malaysia central bank governor Zeti Akhtar Aziz said that a prolonged period of accommodation could encourage investors to misprice risk and misallocate resources. In laymen terms, this simply means that interest rate cannot be low all the time because people may take too much risks and simply buy,buy, buy or also known as speculate. This is quite a sure sign that the increase in interest rate would be happening really soon. How many basis points? That’s up for debate. 25 basis points or even 50 basis points, perhaps.
Nevertheless, the overnight policy rate was maintained at 3 percent yesterday. What would happen if the rates were to increase? Assuming the fundamental remain same, Ringgit value should appreciate a little. Thus far, Ringgit has risen 2.8% in the last 3 months. In other words, if you were those who are currency investors and you bought Ringgit, you should have been able to profit a bit and if the interest rate goes up, perhaps the Ringgit continue to trend upwards. Note, only if everything else remains the same.
Bank Negara Malaysia also said that as of now, the economy remains supported by domestic demand and its exports will benefit from a recovery in advanced nations and regionally. Private sector spending is expected to remain robust. Investment activity is supported by broad-based capital spending, particularly in the manufacturing and services sectors. Private consumption will be underpinned by stable income growth and favourable labor market conditions. In laymen terms, it means Malaysians are still buying. Just look at the queue outside certain restaurants during lunch hours, as well as people who are buying new mobile phones plus new cars which are all above RM70,000 or higher or even the always full of people coffee chain, Starbucks. The new malls, the new retail stores, the revamping of old buildings into new boutique hotels, all these continue to happen non-stop. In one sentence, at this moment and near future, everything seems fine.
written on 10th May 2014
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