How Malaysia Manage Inflation free essay sample

Due to the inflation, Malaysia government already applied different strategies to face the inflation that occurred recently. Bank Negara Malaysia controls the inflation rate by implementing the monetary policies such as influence the level of interest rate that commercial banks have to pay on their loans. Sometimes commercial banks have unexpected or urgent needs for extra funds, Bank Negara Malaysia will make a short term loan to them in such case. Acceptable collateral and a promissory note (IOU) such as government securities are given when commercial banks borrow.Bank Negara Malaysia will obstruct commercial banks to make loan from them for obtaining additional funds when the inflation occurred. Thus, commercial banks will give up for loan to public and stop borrowing from the central bank due to the increase in discount rate. Therefore, the flow of money from commercial banks to public got reduced and it helps the Bank Negara Malaysia to keep the inflation in a managerial level by reducing the flow of money in the country. Conversely, Bank Negara Malaysia will reset the interest rate when the economic conditions are weak. Figure 2 : Malaysia Interest Rate Chart Problem According to our research, the current inflation rate in Malaysia is expected to reach around 3. 3 percent per year in the near future which is quite high and it needs to be controlled. The high rate of inflation has brought many problems to Malaysia such as lost investment, slow down economic growth and the most important is depreciating in ringgit Malaysia. Purpose The purpose of this report is suggests the steps that can be taken by the Malaysia government to maintain its inflation rate.According to our survey, most of the people agreed that Malaysia government should take necessary actions to maintain the inflation rate. Bank Negara Malaysia must ensure to keep the inflation low and the currency of ringgit is not diminished. If the inflation is too high to a country, people will be started to worry about the purchasing power of their money balances. Between, Bank Negara Malaysia needs to apply various strategies in order to solve the problems caused by inflation. Discussion Monetary Policy Nowadays, the primary tool for controlling the inflation is monetary policy.Monetary policy has the important role for controlling the inflation and it is a policy that used to control the money supply in order to keep the market stable. It is one of the actions can be taken by Bank Negara Malaysia in order to control the inflation by affecting the interest rate. Some monetarists keep emphasizing to maintain the growth rate of money steady and using the monetary policy to control inflation. Based on the survey, most of the people think that the interest rate charge by the commercial banks will be higher due to the higher interest rate.But since Bank Negara Malaysia must ensures to keep the inflation low, they must carry out the monetary policies by increasing interest rate and slowing money supply. There are some instruments such as open market operation and cash reserve ratio can be used in monetary policy by Bank Negara Malaysia. (a) Open Market Operation Open market operation is the buying and selling of government securities by central bank in the open market and it affects the money supply in an economy directly. Open market operation can be used to reduce or increase money supply by buying or selling the government bonds.Bank Negara Malaysia can sell their bonds either to commercial banks or to the public in order to reduce the money supply. The capability of commercial banks for giving out loans can be decreased at the same time. The purpose of give out loans is reduces the flow of the money in the market. If Bank Negara Malaysia wants to increase the GDP, they can buy back their bonds for giving people spend in the market, but if they want to slow down the growth of economy, they may sell their bonds in order to takes the money out of system. Open market operation should be taken by Bank Negara Malaysia because it affects consumer spending directly. (b) Reserve requirement As we know that reserve requirement is a central bank regulation that sets the minimum reserves for each commercial must holds to customer deposits and notes. The function of reserve requirement is changes the amount of loans available in order to influence the country’s interest rate and borrowing. It is another instrument can be taken by Bank Negara Malaysia to control the inflation by increasing the reserve ratio.Bank Negara Malaysia can controls and limits the reserve ratio for the purpose of influencing the ability of commercial banks to lend. Commercial banks will raise the interest rate of the loan to public when they hold a limited excess requirement. People are encouraged to spend less and save more due to the higher interest rate. It would make more expensive and difficult for people to borrow money from commercial banks. Besides, it will cause the investment and consumption to slow down to a level that is sustainable and reduce the prospect of high inflation.However, Bank Negara Malaysia should not encouraged to simply changes the reserve requirement but for some conditions. Fiscal Policy There seem not enough for only depending on monetary policy, it may not control the inflation alone. Therefore, it must be supplemented by fiscal measuring. When the inflation occurs, Government should keep surplus budget in order to reduce the government spending and increase taxes. For this purpose, the government should collect more in revenue and spending less. Fiscal policy can be divided into two types which are expansionary policy and contractionary policy. Basically, the aims of contractionary policy are to close an inflationary gap, restrain the economy, and decrease the inflation rate. It is the condition when government decreases the government purchases, increase taxes, and/or decrease in transfer payments are used to solve the inflationary problems. (a) Reducing the level of government purchases One of the three fiscal policy tools can be conducted by government is reduce the level of government purchases.Government purchases are the expenditures by government especially the federal government spend on final goods and services. The government should cut off unnecessary expenditures on those non-development activities in order to control the inflation. Nevertheless, it is not easy to do so because very difficult to distinguish between those necessary and unnecessary expenditure. By the way, reducing their purchase also can decrease aggregate production, income, and the inflation rate. Source: Ministry of Finance, Kenanga Research Figure 3 : Budget Operational Expenditure ChartAccording to the chart above, the government’s operation expenditure has been increased rapidly over the past 10 years and dramatically for this few years. Operational expenditure includes rental, maintenance, salaries, services and general supplies. The government must put more efforts in order to control the operational expenditure which is becoming difficult to control. Most importantly is the government should cut down on wastage, corruption and maintenance bills for those poor construction. The development expenditure which has certainly effects in the economy has been occupied by the operational expenditure.The government should expand development expenditure but not operational expenditure because deficit in government budget will occurs due to the larger of operational e xpenditure. If this condition keeps going on, our economy will be pointed certainly at the risk of disruption in the near future. (b) Increase taxes Another fiscal policy tool should be supplemented by taxation. As we know that, taxes are the compulsory payment that made by the government to the public. Taxes are used by the government to impose on the rest of economy in order to generate the revenue and undertake other government functions.