RISING SUPPLY SHOCKS CALL FOR STRATEGIC APPROACH

KUALA LUMPUR, March 24 (Bernama) -- Increasingly complex supply shocks going forward call for a strategic approach by the policymakers to better navigate through these challenges successfully, said Bank Negara Malaysia (BNM).

In its Economic and Monetary Review 2024 released today, the central bank said supply shocks are likely to increase in scale, frequency, and persistence in the future, driven by geopolitical tensions, deglobalisation trends, demographic shifts and climate change challenges, among others.

Supply shocks are generally defined as disruptions that increase production costs or constrain output due to factors such as geopolitical tensions, natural disasters or policy changes.

To effectively manage supply shocks, a balance of analytical rigour, strategic coordination, and credible communication is required, said BNM.

It added that the outlined framework provides a structured approach to understanding and responding to supply shocks, ensuring that monetary policy decisions are well-informed and context-specific.

“The COVID-19 experience, coupled with the threat of increasing frequency and severity of supply shocks going forward, underscores the importance of a balanced and thoughtful approach to the conduct of monetary policy.

“This includes tailoring responses to domestic conditions and the specific nature of each shock, as well as ensuring that monetary policy is calibrated in an appropriate and timely manner,” said the central bank.

BNM said monetary policy cannot work in isolation from other policies, particularly in responding to policy-induced supply shocks, with close coordination between fiscal and monetary policies being crucial for a more coherent and effective response.

Additionally, the central bank said that clear, timely and transparent communication of monetary policy objectives is essential for shaping public and market expectations, especially during periods of economic reform.

On managing recurring supply shocks, BNM suggests that policymakers must provide timely and informed responses, as strong cooperation between them is important to assess supply shocks comprehensively, capturing both immediate effects and longer-term structural implications.

The central bank pointed out that consistent and credible messaging reduces uncertainty, limits overreaction by households and businesses, and lowers the risk of inflation expectations becoming unhinged.

“In addition, it is also important to systematically communicate uncertainty, particularly during periods of frequent and large supply shocks. This approach strengthens transparency and credibility, supporting BNM’s objectives of price stability and sustainable growth,” said BNM.

It added that adopting such an approach helps maintain price stability over the medium term without placing undue pressure on economic activity, enabling the central bank to better navigate complex challenges, foster public trust, and support its objectives of price stability and sustainable growth.

-- BERNAMA