Further interest rate cut seen

Government tries to sustain growth in worsening economic outlook

THE world’s leading economies are screeching to a halt, dragging down growth in the developing nations as well. In most countries, efforts to revive their economies or mitigate the effects of a global slowdown are aplenty.

Governments have been making a greater effort, from fiscal pump priming to drastic monetary policies, over the past few months to survive what is expected to be the worst recession since World War II.

And desperate situation calls for desperate measures. Several countries have slashed their interest rates to near zero levels recently, effectively making cheap money available as a means to stimulate their ailing economies.

The US started the ball rolling after the Federal Reserve pegged the key interest rate at a range of 0% to 0.25%. Hong Kong’s central bank followed suit by slashing its key interest rate to an all-time low of 0.5%, while Japan’s central bank has its key interest rate slashed to 0.1%.

While other countries have yet to resort to such unprecedented low interest rates, they have also reduced their key rates over the week.

For instance, China has already lowered its benchmark one-year lending and deposit rates by 0.27-percentage point to 5.31% and 2.25% respectively, while the European Central Bank will be reducing its interest rates early next year.

In Malaysia, another round of overnight policy rate (OPR) cut by Bank Negara is also looking more likely against this backdrop of global interest rate cuts amid a worsening economic outlook. Local economists are expecting the OPR cut next month to range between 50 and 75 basis points (bps) to 2.5% to 2.75%.

By reducing the country’s benchmark interest rate, the Government can enhance its efforts in sustaining Malaysia’s gross domestic product as the economic environment becomes increasingly challenging in the months ahead.

Theoretically, a lower interest rate, which implies a lower cost of borrowing, can help boost a country’s economy by stimulating business investment and consumer demand. Businesses will find more incentives to invest when interest rates are low, while consumers will be induced to apply for loans for big-ticket purchases such as cars and houses.

For the existing borrowers, on the other hand, the lower loan repayment would leave them with more disposable income to spend on other goods and services.

Last month, Bank Negara slashed the OPR – which had remained at 3.5% since March 2006 – by 25bps to 3.25% when the inflationary pressure began to ease in October.

Inflation, as measured by the consumer price index (CPI), fell from 7.6% year-on-year (y-o-y) in October to 5.7% y-o-y in November. This is mainly attributable to lower fuel prices, which the Government has gradually reduced since August when crude oil prices began to fall. The pump price of petrol is now RM1.80 per litre while diesel is sold at RM1.70 per litre, compared to their highs of RM2.70 and RM2.58 per litre respectively in June.

The CPI is expected to slide further in the months ahead as the lower commodity prices begin to have a wider effect on more goods and services. For instance, over the week, Domestic Trade and Consumer Affairs Minister Datuk Shahrir Abdul Samad said the Government was expecting food manufacturers to start reducing their prices early next year.

The continuous slide of inflationary pressure provides a conducive environment for Bank Negara to lower interest rates. On top of that, with the US interest rates near zero levels, the Government can maintain a wide positive interest rate differential with the US, which helps limit the outflow of portfolio funds from the country.

The Star- By Cecilia Kok