How Malaysia Manage Inflation

Topics: Inflation, Monetary policy, Central bank Pages: 9 (2766 words) Published: July 21, 2011
Table of Contents

1. Background

2. Problem

3. Purpose

1. Monetary Policy
Open Market Operation
Reserve Requirement

2. Fiscal Policy
Reduce the level of government purchases
Increase taxes
Transfer Payments


List of Illustration
Figure 1: Malaysia Inflation Rate Chart
Figure 2: Malaysia Interest Rate Chart
Figure 3: Malaysia’s Budget Operational Expenditure 1998-2009 Chart Figure 4: Malaysia Corporate and Personal Income Tax Rate Trend


The inflation rate in Malaysia has last reported 3.3 in May of 2011. Although this rate is not quite high but the government must to control before it continue rising because in many other countries, the inflation has brought a lot of troubles and become a burden to them. This report is discussing how Malaysia government including Bank Negara Malaysia must carry out some strategies and actions to maintain the inflation rate in a managerial level. In order to prevent the problems such as slow down economic growth, loss of investment, value of ringgit diminished. Yet the government still operates by reducing the flow of money in our country, and influencing the interest rate for borrowing to commercial banks. To do this, the inflation could be better controlled and the things we need to do are implement the fiscal policies like reducing the government purchases and increase taxes. Additionally, the monetary policies should be more effective to control the inflation rate, so that it could cause the inflation to be steady.

Inflation is a contention issue in all around the world and it is a rise in the general level of prices of goods and services in an economy over a period of time. Each unit of currency buys fewer goods and services once the general price level rises. Inflation causes many other problems to the country all to the world and it can be positive and negative at the same time. The causes can be commonly such as the excess printing of money by the government, a rise in labor costs, a drop in the exchange rate, increased taxes or wars. Inflation is not a laughing matter and in fact not even a single country including Malaysia can avoids the inflation happens. The economy of Malaysia is well known as the 3rd largest economy in South East Asia. Malaysia current inflation situation is not much difference compares with other countries. Inflation rate in Malaysia has reported at 3.3 percent in May of 2011. From 2005 until 2010, the average inflation rate in Malaysia was 2.77 percent reaching an historical high of 8.50 percent in July of 2008 and a record low of -2.40 percent in July of 2009 Figure 1: Malaysia Inflation Rate Chart

The ordinary rate of the inflation is changes from country to country. The normal rate of inflation of Malaysia is below 5% per year. Based on the historical, the normal rate of inflation in Malaysia is 2% per year but the rate has increased to 5% per year as normal rate is because of the big wave of inflation that happened on 1970 to 1974. Some economists said that the inflation rate in Malaysia has been forecasted to climb to 3.2 percent this year and it is causing Bank Negara Malaysia (BNM) to increase interest rates, according to the Malaysian Institute of Economic Research (MIER). The prime minister, Najib said the Malaysian economy must to maintain economic growth in at least six percent every year to reach the desire of the Malaysia. He also mentioned that the inflation in Malaysia should be minimized but not to burden the public and if inflation is not controlled at the lowest rate possible thus Malaysians will face troubles. The economic uncertainty is created by the...
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