Inflation and the Ringgit

"The interest rate remains," screams the headline.On Friday 24th July 2008, Bank Negara decided to let the interest remains despite the fact inflation is slowly creeping up to 7.7% in June.The decision not to is intended to help businesses grow.The argument is if interest rate goes up, cost of financing goes up and growth may be affected. In favour of growth let inflation goes up.The thing about inflation figures is that nobody believes what is being told.Possibly because its an aggregate figure of collection of prices throughout the country regardless of cities or rural areas. So for all intents and purposes the figure given would apply to Ulu Tembeling and Kuala Lumpur although its pretty obvious they are not the same. Perhaps a sampling of customers being given some sort of an electronic device in which they can key-in prices of selected goods whenever they do a purchase transaction.These sample of customers will be rewarded for their efforts and a team from the statistics department will do a random verification to ensure that prices are not simply keyed-in.Each customer will be given an identification number which will indicate his area.This data can be compiled by cities, towns or kampongs.The component items in the basket will need to be looked at and items that do not apply to Malaysian tastes such as cheese may need adjustments.
Secondly inflation is also imported.We import about RM15 billion of worth of food per year, anything and everything, as if we are trying to please every nation that we trade with. At the moment our currency is slowly weakening with the US Dollar.The picture with the other currencies such as Euro, Sing Dollar is much worse.If we are truly strong then we should be strong with any currency.Three months ago its RM4.80 to Euro.Today its RM5.20.With Sing Dollar it was RM2.20 now its RM2.44.Why do we let our Ringgit take a beating.Call it whatever you want, NDF or plain short selling we are at the losing end. The moment news of the interest rates remains, there was a sell down of Ringgit, weakening the currency even more. Why?Our growth figures are better than our neighbours and yet our currency is weaker than them and we dont do anything about it. The argument that if the currency appreciates our exporters will have problems does not hold anymore as we were at USDollar1 for RM2.50 before the crisis.If we go up to RM2.80 to US$1 we will solve a lot of problems including the imported inflation and our import figures will be much better.Our currency does not reflect our economic growth. There is no need to talk about subsidies and petrol price or commodities. The strength of the economy is in the currency.