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PETALING JAYA: The Center for Market Education (CME) said it would have preferred to see the political will to cut government spending rather than the interest rate increase in addressing inflation.

Additionally, it said, there is a need for more private investments – which are based on market signals and may be discouraged by the tightening of monetary policy – than government spending – which is based on borrowing and the money printing press and, therefore, strongly inflationary.

CME CEO Dr Carmelo Ferlito said interest rates should be determined by market forces instead of the central bank.

“The power of the central bank to fix the interest rate, in the pretense of being able to fix the

economy as if it was a mechanical engine, should be abolished.

“When the interest rate is fixed by the monetary authority, we are not in the presence of a market price; rather, it is a ‘political price’. These means that economic decisions are taken not based on the interaction between supply and demand; instead, investment choices are made on the basis of what the people leading a central bank believe to be the ‘appropriate’ interest rate for the economic system,” he said in a statement yesterday.

This can lead to bad investments and financial instability within a boom-and-bust cycle.

“Due to the quantity of money into circulation, the hike is inevitable. It only came earlier than expected. But a contractionary effect has to be expected, although its strength is not yet to be known,” he added.

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