KUCHING: The strength of the ringgit is influenced by a range of factors that are constantly changing and beyond anyone’s control, according to Centre for Market Education (CME) economist Carmelo Ferlito.
He said that while interest rates play a role, they are not the sole determinant of the currency’s performance.
Drawing an analogy to weather forecasting, Ferlito highlighted the limitations of central banks in managing the currency.
“Just as meteorologists can’t control the sun, clouds, wind, or rain, you can merely forecast based on countless variables. That’s how it feels when handling the currency.”
The focus, said Ferlito, needs to shift from the overemphasised interest rates to the confidence of people and businesses in their profit-making potential.
“This is the true driving force behind economic decisions, akin to a car’s engine, more than just the fuel price (interest rates) alone,” he said.
Ferlito pictured a confident entrepreneur, ready to invest in new business ventures, not frightened by elevated interest rates, viewing them as a necessary investment rather than a discouragement.
“If the wind in their sails, or ‘animal spirits’ as we call it in economics, is strong, the higher costs of borrowing won’t stop them from setting course,” Ferlito said.
Regrettably, he noted, policymakers tend to focus more on interest rates, a measure they can control, rather than the elusive ‘animal spirits’ which refers to the psychological factors influencing economic decisions.
He suggested that it’s time to liberate the interest rate from central authority and give it back to the market.
“Just as the price of a banana or a bicycle is determined by the buyers and sellers, so should the interest rate reflect the preferences of savers and borrowers,” he said, likening it to a bird returning to its natural habitat.
Ferlito, however, praised Bank Negara Malaysia’s (BNM) efforts to counterbalance inflation worries, the ringgit’s value, and the global economic slowdown.
But he pointed out that external factors like issues in China and internal challenges such as political uncertainty and inconsistent economic strategies are currently pulling the rug from under the ringgit’s feet.
Ferlito slammed the mixed messages being sent by different ministries.
“You cannot bake a cake with cooks who keep changing the recipe. One moment they’re backing market-friendly rules, and in the blink of an eye, they are dropping in tough laws on prices and jobs.”
“To bring Malaysia’s economy back to its feet, we can’t rely solely on the central bank making small adjustments to interest rates. We need a comprehensive approach, like a full orchestra playing a symphony, with strategic investments taking centre stage instead of simply accumulating money in a bank account,” Ferlito cautioned.
Making it easier for foreign entities to open bank accounts, lifting labour and financial restrictions, controlling prices, and reducing government-linked companies’ dominance are key to generating a positive impact on the economy, rather than solely fiddling with the interest rate knob.
In short, Ferlito called for a symphony of changes, not a solo performance of interest rate adjustments.
On Thursday, the BNM announced the interest rates would be kept unchanged at 3 per cent.
