Malaysia’s Zeti sees less ECB stimulus risk compared with Fed

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(Sept 4): The European Central Bank’s prospective quantitative easing is unlikely to be as disruptive to emerging markets as the Federal Reserve’s, Malaysian central bank Governor Zeti Akhtar Aziz said.

“In terms of their operations, it’s not going to be as significant as in the U.S., which has a greater influence,” Zeti, who guided Malaysia’s central bank through the Asian financial crisis, said in an interview in Kuala Lumpur yesterday. “We recognize that easing of policy is very important, but for it to be effective, it needs to be reinforced by other parts of the government” so that it won’t need to be in place for an extended period, she said.

ECB policy makers meet today, after President Mario Draghi last month added to speculation he’s preparing Japan-style debt purchases known as quantitative easing to support the economy. Draghi has urged governments to complement monetary and fiscal policy with structural reforms to bolster a euro-area economy that stagnated in the second quarter and is vulnerable to geopolitical risks.

The Fed, which also uses quantitative easing in the U.S., is scaling back its debt purchases and is on course to end them this year. Emerging markets suffered outflows that caused their currencies to plunge last year as the U.S. central bank prepared to reduce its purchases. Investors are awaiting the first interest-rate increase after the so-called tapering ends.

Great Expectation

There is “great expectation and anticipation” that the Fed’s policy normalization will happen in an orderly manner, said Zeti, 67.

“We recognize that such easing of policy is important but at the same time there are limits to what such easing can do anyway and therefore they need to take that into account,” Zeti said, when asked if she is concerned that developed-nation central banks are contributing to a build-up of global financial risk with their easing policies.

“If there’s too-excessive reliance, of course it generates liquidity and of course it imposes the requirement for others to manage those risks. And this is what all of us have done,” she said.

Malaysia was the first country in Southeast Asia to raise its benchmark rate in 2014 -- to 3.25 percent -- as investment, private consumption and overseas orders for the nation’s goods sustained growth. Southeast Asia’s third-largest economy is outperforming most of its regional counterparts amid slowing expansions in Indonesia and Singapore last quarter.

Watching Inflation

Asked if she sees a need to be pre-emptive on rates given the risk inflation may accelerate, Zeti said the central bank doesn’t look at just a single number.

“We look at hundreds of indicators to assess the performance of the economy and to assess the outlook for inflation,” she said. “We need to monitor the second-round effects very closely and this will be an important consideration in deciding the interest rate policy.”

Policy makers will consider the risks to underlying inflation rather than one-time adjustments that result in higher prices, Zeti said. Consumer prices will increase this year and into 2015 when the government implements a new tax on goods and services, Zeti said.

“Obviously we are not going to run the economy to the ground to achieve low inflation, we look at the risks to growth as well,” the governor said. “And if we see that growth is slowing very significantly, then that will be a cause for some pause in any further raising of rates in the near term.”

Price Stabilization

The inflation rate will stabilize at around 3 percent in 2016, she predicts. The central bank is not concerned right now that there will second-round price effects and the country isn’t seeing excess demand or wage pressures, she said.

Second-quarter growth was the fastest since the final three months of 2012, and averaged 6.3 percent in the first half. Gross domestic product expansion in the second half may be between 5 percent to 5.5 percent or better, Zeti said yesterday.

“The actions that we have already taken are part of the normalization because the interest rate that is currently prevailing is very supportive of growth,” she said. “It will always be referred to as normalization when it does not have a dampening effect on growth. This is adjusting the degree of accommodation so that it will not promote financial imbalances.”

The ringgit has gained 3 percent in 2014, the best performance in Asia after Indonesia’s rupiah, data compiled by Bloomberg show. Export growth, portfolio inflows and foreign direct investment have contributed to the strength, Zeti said.

While the currency will reflect Malaysia’s fundamentals over the medium term, it may be subject to financial flows triggered by events that unsettle markets, Zeti said.

“There could be occasions where the currency would move against the underlying fundamentals,” she said. “The role of the central bank would be just to maintain orderly conditions, and we would not try to affect the direction or the movement of the currency.”