WHAT goes around also certainly comes arounds in politics as the Pakatan Harapan (PH) government now stands accused of the very thing it criticised when it was in the opposition.

There was a time where the opposition was up in arms and chided the government of the day for allowing an Overnight Policy Rate (OPR) hike, saying it is a sign of an ailing, mismanaged economy. However, the same people, now holding the levers of power, are strangely silent about the recent rise in OPR.

Similarly, Communications and Digital Minister Fahmi Fadzil, who was castigating Berita Harian for reporting on the potential interest rate hike, is now maintaining an elegant silence given that the prediction has now turned out to be true.

If anything, this latest hike should ingrain into our politicians the valuable lesson of exercising caution in using OPR to attack their political opponents. 

This is because the job of determining interest rates – or managing the country’s monetary policy – is out of the realm of elected lawmakers.

At first glance, there are some benefits to making monetary policy “independent” from politicians.

Imagine in a democratic country where the central bank governor is subservient to the finance minister: this would mean that the finance minister would be vested with the power to decide not just fiscal, but also monetary policy.

With both fiscal and monetary policy in his clutches, some would deem the government’s economy too powerful, which runs counter to a free-market economy that prefers limited government interference. 

By having total control of monetary policy, the government also has its grip on the business cycle where lawmakers could technically choose the time to reflate or shrink the economy.

The ones in charge of the current government would surely be tempted to dabble with the interest rate to “win” the economic argument.

We also cannot discount the fact that this might be irresponsibly done with the sole intention for the sitting government to sell a successful economic story while facing an election. 

However, there is always the possibility that bucking the economy means the economy would buck you back.

A fall in interest rate may signal there is more money for households to spend along with cheaper loans and mortgage. However, if the fall is administered in a time when the economy is on the verge of overheating, it would lead to the disastrous consequence of inflation and send the economy into a tailspin.

Conversely, the same logic applies that any democratic government could be reluctant to raise interest rates even if the climate of the economy necessitates it.

Needless to say, any democratic government would not even dare raise the interest rate before a general election even if there is a need to cool down the economy. 

Elsewhere, the control of monetary policy was intensely political and this power was also misused by the government which led to deeper and longer recession and a volatile currency.

This is the biggest reason why the former UK prime minister Gordon Brown decided to set the bank free only after four days when he was appointed chancellor of the exchequer following a landslide election.

This was explicitly done to shed the image of economic mismanagement, which Brown’s party had inherited, but it was aimed at stabilising inflation with little political interference. 

Therefore, the recent hike in OPR should be examined under the lens whereby the central bank has operated independently and deemed the rise necessary to ensure the long-term stability of the economy.

However, there is also increasingly a counter-argument whereby a central bank that is too independent might suffer from the lack of accountability.

Even though the government is not to blame for the higher mortgage and loan because of higher interest rates, the public, especially those who feel the pinch because of the extra sum they have to cough up, must be allowed to ask for explanations for the decisions BNM has made.

There is also an element of inequality that we cannot possibly ignore: that a higher interest rate means poorer people are expected to fork out more money while richer folk are more likely to have savings that benefit from higher interest rates.

Thus, the central bank dilemma is between independence and accountability, and there is always a balance that could be pursued by the government.

For instance, the government could legislate to ensure that the decision made by the Monetary Policy Committee (MPC) could be scrutinised by MPs to ensure there is an element of checks and balances – parliament should be allowed to interview the candidates for the governorship.

Most importantly, the governor could also be compelled to answer before parliament if the decision the central bank has made does not align with the economy on the ground.

Implementing one of these policies should be top priority if the country intends to move towards a more nuanced debate on the central bank’s interest rate. – May 14, 2023.

* Kenneth Cheng has always been interested in the interplay between human rights and government but more importantly he is a father of two cats, Tangyuan and Toufu. When he is not attending to his feline matters, he is most likely reading books about politics and human rights or playing video games. He is a firm believer in the dictum “power concedes nothing without a demand. It never did and it never will”.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.