Malaysia’s Positive Real Interest Rate

Malaysia’s “real interest rate” is now positive. How do we know the real interest rate? What does a positive real interest rate mean? What are expectations for Malaysia ahead?

 

Key Definitions

  • Inflation: A general and sustained increase in prices for goods and services in an economy.
  • Nominal Interest Rate: Interest rate seen before taking into account inflation.
  • Real Interest Rate: Rate that you receive after factoring in inflation.
  • Consumer Price Index: A measure weighted average of prices of a basket of consumer goods and services.
  • Overnight Policy Rate: Interest rate at which a depository institution lends immediately available funds (balances within central bank) to another depository institution overnight.

 

Nominal Interest Rate – Inflation Rate = Real Interest Rate

 

Key Interest Rate Figures

  • 2018 Jan Consumer Price Index (CPI): 2.70%.
  • Overnight Policy Rate (OPR): 3.25%.
  • 2017 Inflation Rate: 3.9% (ranging from 3.2% – 5.1%).

 

Why Lower Inflation Rates?

  • Ringgit strengthened from USDMYR 4.42 to 3.90.
  • Petrol price moderated compared with a year ago.
  • Lower prices of imported products.

 

Positive Real Interest Rate

  • Malaysia’s real interest rate now positive with lower inflation and higher nominal interest rates.
  • Real Interest Rate = 3.25% – 2.70% = 0.55%.
  • If your savings interest rate is higher than the inflation rate, you are actually making (some) money in real terms.

 

What Does Malaysia’s Economy Need?

  • Low and stable inflation rate (Inflation: 2.70%).
  • High employment rate (Unemployment: 3.30%).
  • GDP growth (GDP Growth Last month: 0.90% / Annually: 5.90%).

 

Economic Expectations 2018

  • GDP Growth Rate: 5.4%
  • Unemployment Rate: 3.5%
  • Inflation Rate: 2.90%
  • Interest Rate: 3.25%
  • OPR hikes: 0.25% (no further rate hikes in 2018)

 

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