Return towards normalcy

WE have always heard the issues relating to historic low interest rates. We were warned that the excesses created by ultra-low interest rates will rear a problem in another facet in another time and a return to normalcy is what is needed.

For some, few see a problem with soaring asset prices as a result of low interest rates, which is kept low to facilitate economic growth. Higher asset prices means wealth creation for some but it also inflates the value of such assets.

Case in point is the price of homes. For the longest time prior to 2008, inflation on the price of a house was a low single-digit figure but after rates were slashed, the price of homes skyrocketed to a sit- uation today where million-ringgit prices for condos are common in places like Kuala Lumpur.

What higher interest rates does is that it will put a lid on such appreciation. A 25 basis point hike probably will only create a dent but over time, a return to normalcy will mean that interest paid on expensive homes will rise.

Car sales also will probably take a hit with higher interest rates but at the same time, higher interest rates do help savers who have been sacrificed to ensure that economic growth continues in the face of past volatile market conditions.

Right now, the higher interest rates serves another purpose. The ringgit is the prime beneficiary from higher rates and it has been moving up in tandem of that and also higher crude oil prices and a much better current account surplus than what was expected for last year.

Living costs is now paramount in the minds of basically all households. Food inflation as a result of a weaker currency has been a big complaint and a stronger ringgit will help in keeping that in check. On the other hand, households with variable housing loans will end up paying a little more for their loans but the trade off, at least in the medium term, will favour the benefits of a stronger ringgit as food inflation has been much higher than the budge upwards in housing loan repayments.