Answer to Question #274600 in Macroeconomics for Leena

Question

Malaysia’s Central Bank Raises Interest

In January 2018, Bank Negara Malaysia (BNM), Malaysia’s central bank, raised its

interest rates for the first time since July 2014. Economists speculated that it is a

one-time event and that that there won't be other interest rate hikes given that

Malaysia’s growth is steady and inflation is mild.

Source: Reuters, January 25, 2018

a. Why do you think some economists speculated that the interest rate hike is a one-

time event?

b. What would be the effects of BNM hiking the interest rate? Explain the immediate

effects and the ripple effects.

c. What could be the risks arising out of no interference from the central bank?

College of the North Atlantic – Qatar/ Fall 2021/JM 3 | Page

Answer 1

(a)

Some economists speculated that the interest rate hike is a one time event because it has only been experienced for the first time. It is expected that at all times, both borrowers, lenders and savers should be favoured.

(b)

When interest rates increase very fast, it may result in a chain reaction that has effects on the domestic economy as well as the global economy. It may result in a recession in some cases. If this is experienced, the government can track back the increase but it will take sometime for the economy to recover.

Likewise, an increase in rates of interest sends the price of bonds lower, hence negatively impacting fixed income investors. As rates go up, people are also likely to borrow or refinance existing debts, since it is expensive to do so.

(c)

The risks arising out of no interference from the Central Bank include taking of unexpected actions which may result in many financial crisis.