Malaysia’s minimum wage will ‘not ignite inflation’

Zeti Akhtar Aziz, the veteran governor of Malaysia’s central bank, has ruled out that the country’s introduction of a minimum wage will fuel inflation.

Speaking exclusively to Emerging Markets yesterday the chief of Bank Negara Malaysia said the move was well-timed and necessary. “Over 100 countries in the world have a minimum wage and it is timely for Malaysia to implement a minimum wage,” she said.

“There should be payment according to productivity and wages represent a small part of the total cost of production and therefore this is not going to be inflationary.”

The Malaysian government used the occasion of Labour Day to announce a new private sector wage of 900 ringgit ($300) a month except in Sarawak and Sabah where it was set at 800 ringgit.

Portraying the move as a social imperative rather than a political gesture, the governor said the policy was aimed at assisting lower income groups escape the poverty trap.

“These income groups have the highest propensity to consume, so they will be spending these monies and contributing to the growth of domestic demand which is important.”

Zeti pointed to the fact that most people in Malaysia possessed a savings account meaning the introduction of the minimum wage would enhance savings by low income groups. “We also have the financialization of these savings if they have any surplus funds.”

Nevertheless the move will not be all plain sailing and according to London based Capital Economics minimum wages can ultimately price some workers out of the market.

The bearish trajectory of the global macroeconomic crisis is being viewed with growing concern by the governor and its potential impact on Asian financial markets.

“The global economic crisis has breached all the threshold levels. Each level required a different solution and therefore it has reached a stage where it is difficult to know what else will happen next,” he said.

The governor echoed calls at the ADB meetings for eurozone governments to take urgent action. “If the economies do not come together then the crisis will run its course,” she said.

However any impact on financial markets in Asia would be varied, she added. “In different countries that have trade relations with Europe and the US they will affected and if there is a major economic contraction trade will be hurt.”

Regional Asian economies would be resilient but overall growth will hit, the governor said. “Our economies are very much driven by domestic demand and this will partially mitigate the impact on our economies. We will have more modest growth but most of us will have growth between 4 to 5%.”

Deleveraging by European banks may also hurt growth in Asia, the governor said. “It is the financial challenge, access to financing and their divestment out of our region but we feel Asian financial intermediaries will be able to step in.” Monetary policy appears steady in the region and Zeti said she did not see any immediate need for concerted quantitative easing by central banks in Asia. “There is sufficient liquidity in our financial system and in fact we are absorbing this liquidity and central banks have the potential to unwind these positions.”