Question

Discuss the important of interest rates to managerial decision making in the good and services; and the asset property market. Please support your discussion with the facts and the data from Malaysia.

Answer 1

Price stability in the economy helps government in effective allocating financial resources to different sectors. It also helps companies in formulating competitive production and sales strategies depending on market demand. Rising price levels affects the budget of people and that lowers the market demand of goods and services. Similarly deflationary trend or low price level also affects the profitability of companies and it signals slowdown or recession in economy. Therefore, both inflation and deflation are injurious to the healthy economic condition. While discussing price stability, inflation and deflation, it is also worthwhile to discuss interest rate, which is small monetary amount that lenders such as investment companies, government and banks charge to borrowers for loans. Both government and business organizations borrow fund or money from various sources such as open market, banks, insurance companies etc and are required to pay specific interest rates on principal amounts to their lenders. The rate of interests vary on loan types and loan amounts. The central bank formulates interest rate policy also known as monetary policy to regulate the supply of fund in an economy. The interest rate also determine the performance of assets such as equity shares, government bonds and securities in capital market. Generally equity shares pay high dividend or rate of interests to investors but market risk involved in equity stocks is very high and actual rate of return (RAR) on equity share vary on multiple factors. Mutual fund is another investment area that provides a fixed RAR to investors and risks in mutual fund market is comparatively lower than equity stock market. However, the best investment option for small investors is government securities that offers a fixed RAR throughout the investment period but the interest rates on government securities and bonds are usually lower than mutual funds and equity stocks.

Malaysia is a federal state and a member of ASEAN. It has bilateral trade and economic relations with many countries in Asia, Europe and other parts of the world. The federal government regulates pricing of LPG gas, flour, bread and sugar in the country. The administrative price control of certain commodities are effective during festival seasons in a country. The central bank of Malaysia kept its key interest rate at 3.25% in its September month's monetary policy of this year. The central bank of Malaysia kept key interest rates unaltered on its assumption of high growth rate. The consumer price index (CPI) in January 2018 was 120.9 that marginally rose to 121.0 at the end of October 2018. The RARs on government bonds in Malaysia fluctuated between 2.87 and 5.35 in the period 1977-2018.