Saturday, April 26, 2008

Rates not the answer to high food prices?

Malaysia's central bank chief Zeti said interest rates are not the answer to curb high food prices? This is a structural problem that has be dealt with supply. Really? Or is she trying to tone down the expectation of rate hike to slow down hot money flows? If rate is not the answer, is exchange rate the answer? Well, it will depend our big brother, China.

If most think Yuan still undervaued by 10-15%, Ringgit will be heading to 2.8-2.9 esspecially most perceived both are moving in a lockstep? Does this means bond and equity market will continue to enjoy the rally?

The recent worldwide equities markets rally will put some pressure to those who have not participated. Is it too late to buy? The current rally is selling on the story of high inflation will stop Fed from keep cutting interest rate. This will lead to rebound in US $ therefore buy US $ asset. This is only a short term story but longterm could still looking pretty bleak when presidential election reaching its tail end by year end.

Turtle has more than 50% invested and will still maintain his stance of not buying at this point. Turtle is going to save more money, when the right opportunity arise, strike without fear! Turtle is willing to forego a small mini rally and do not think he is missing a superbull run!

KUALA LUMPUR(The Edge): Malaysia's central bank does not believe interest rates are the answer to curbing high food prices, central bank chief Zeti Akhtar Aziz said on April 25 .

Annual inflation hit a 13-month high of 2.8% in March, driven mainly by costlier food, prompting some economists to speculate that the central bank may have to raise interest rates, among Asia's lowest, by the end of the year.

But Zeti told reporters food-price inflation was being driven by structural problems with supply and that it would be better dealt with by boosting supply rather than adjusting rates.

"This increase in prices is due to structural developments that relate mainly to supply conditions that are not able to meet demand," she said after releasing a report on Malaysia's offshore financial centre of Labuan.

"Interest rates generally respond to changing demand conditions. In this situation, therefore, to address the issue of rising prices, we need to address it by addressing the structural issues...Therefore interest rates are not the answer in this kind of environment and under these conditions."

Malaysian inflation has crept up since late last year but remains among the lowest in Southeast Asia, thanks largely to price controls on essential goods such as flour and cooking oil.

These controls, combined with the enormous cost of energy subsidies, are putting a severe strain on government finances, which are already in chronic deficit.

The government, as a first step, has begun a campaign to boost agricultural production and announced plans to develop stockpiles of essential foodstuffs like rice and cooking oil. -- Reuters

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