Monetary Policy

When economic conditions are weak, expansionary monetary policy will be implemented. All the things being equal, as the OPR reduced or liquidity increased by either purchasing eligible securities from the banking system or decreasing the SRR, all the processes explained above will be vice versa with effect of contractionary monetary policy, which will boost the economy as shown in Graph 4.

Prior to the introduction of monetary policy, the inflation rate was high and fluctuated greatly from year to year. The most highlighted peak was between the years of 1973-74 where the inflation rate has reached a highest of 16-17%. But, this problem has come to an end after the emerging of monetary policy.

With inflation decelerating after the peak, BNM has implemented interest rate cuts to cushion the economy from a rapidly weakening global economy. The Bank reduced its Overnight Policy Rate (OPR) by a total of 150 basis points between November 2008 and February 2009 to 2.0%, which is the lowest ever in Malaysia’s monetary policy history. As shown in Graph 2, the loosen interest rate policy is to facilitate the ability of banking sector to lend money, boosting investment and economy activities. However, doing so would come with a cost of lowering a bank’s interest earning. In order to offset the decline in bank earnings, BNM also announced to reduce the statutory reserve requirement (SRR) for banks from 4% in December 2008 to 1% in March 2009 in order to reduce the cost of intermediation and to increase the liquidity available to banks.

Being one of the shortcomings, monetary policy normally takes 12-18 months to have its full effect on the economy. As monetary policy works with considerable lags, it must be pre-emptive and respond to forward looking assessments to avoid sudden reversal of policy stance.

In conclusion, MP is always an alternative tool for government in managing their monetary and financial stability although it