monetary policy resulted from the actions of the government, central bank,
currency board and other regulatory committee which decided what is the ideal
size and growth rate of the money supply that will have effects on the interest
rates. They control the economic growth and stability by controlling money
supply, availability of money in the market and also the cost of money or
In addition, modifying the interest rates,
buying and selling of the government bonds, and also changing the amount of
money that needed to be kept by the banks in the vaults or bank reserves can
also be done to ensure the monetary policy is being maintained for economic
growth. There are several questions that related to the monetary policy, which
is (i) how much should be the supply of money in the economy? ; (ii) how much
should be the ratio of interest? and (iii) how much should be the viability of
Other than that, monetary policy can be
divided into two more types that is expansionary and contractionary monetary
policy. Expansionary policy aimed to lower unemployment by the increase of
total supply of money in the economy, boosting private-sector borrowing and
consumer spending, and stimulating economic growth. On the other hand, contractionary
policy slows down the rate of growth by decreasing money supply in the economy
in order to control inflation, or also can be used to increase unemployment and
to reduce consumers and businesses borrowing and spending.
For Malaysian case, the responsibility to
maintain monetary stability holds by the central bank of the country, Bank
Negara Malaysia (BNM). BNM controls monetary policy by influencing the level of
interest rates from borrowings that is interest on loans bears by the borrowers
and also interest on the people savings and deposits. In the rapidly growing
economy, there is the possibility of high inflation. Therefore, BNM will play
its role by controlling funds withdrawals in the banking system and increasing
interest rates. This high interest rates will impact in higher saving and less
spending by the people. The cost of borrowing will also increase, that it will
reduce consumption and investment to an ideal level and at the same time
reducing the probability of high inflation.
On the other hand, in the slow economic
growth, BNM will intervene in reducing interest rates by injecting funds into
the banking systems. Then, the low interest rates will trigger spending and
borrowing and therefore consumption and investment will also increase and
helped in enhancing the economy.
Furthermore, there are several monetary
instruments that can be implement by the BNM to inject and withdraw funds in
the market in order to control the interest rates such as the sales and
purchase of BNM and government bonds and papers, amendments in the statutory
reserves requirements and interbank borrowings.
Malaysia’s monetary policy also helped in
maintaining the country’s economics performances internationally by
implementing lower interest rates compared to the country’s trading partners.
For the international trade and transactions, BNM is responsible in managing
Malaysia’s foreign exchange reserves to make sure that the country is capable
to compete and follow the international requirements and trends. Therefore, this
will reduce temporary changes in the inflows and outflows of the country’s
balance of payments and stabilize Ringgit exchange rate.