Interest rate slashed

Bank Negara Malaysia yesterday slashed its key interest rate by 75 basis points to 2.5 per cent, indicating that downside risks to economic growth had risen significantly.

Consequently, banks are likely to lower their base lending rates (BLRs) in the days ahead, which should make loans cheaper and help drive domestic consumption.

The cut in Overnight Policy Rate (OPR), the second consecutive reduction after a 25-basis-point cut last November, was expected, but the quantum came as a surprise.

Economists had expected a cut of 25-50 basis points, followed by more gradual reductions.

In its first meeting this year, the central bank's monetary policy committee also reduced the Statutory Reserve Requirement (SRR) for banks to 2 per cent, from 3.5 per cent, effective February 1.

A reduction in the SRR will inject a certain amount of liquidity into the financial system, allowing banks to lend more to finance economic activities.

Bank Negara said that with Malaysia's growth prospects under threat, the big reductions in the OPR and the SRR were aimed at being pre-emptive in providing a more supportive monetary environment for the domestic economy.

CIMB Investment Bank chief economist Lee Heng Guie described the move as the most aggressive since the 150-basis-point cut during the economic downturn in September 1998.

"The move was within market expectations as the slowing of the global economy had already pushed our exports into contraction.

"We also need to ensure accessibility of credit by the banking system through lower borrowing costs," he said, adding that there was still room for Bank Negara to make more cuts.

However, Lee felt that there were still risks to achieving 3.5 per cent gross domestic product growth for this year.

Bank Negara said deteriorating global economic and financial conditions, pushing major industrial economies into recession, had increased the threats to global growth.

"The contraction in global demand and trade combined with lower commodity prices has affected export earnings of many of the regional economies, including Malaysia," it said in a statement.

A large drop in external demand has already seen exports fall and a moderation in the pace of private investment activities, which in turn have affected labour market conditions.

"Under these circumstances, the urgent implementation of policy measures will be key towards ensuring that the Malaysian economy continues to experience positive growth in 2009," Bank Negara said.

Inflation has decelerated and is expected to continue easing amid weaker demand and lower imported inflation.

Bank Negara said that although the Malaysian banking system remained fundamentally sound, it would continue to direct efforts towards ensuring access to credit for all sectors of the economy and that the interest rate cut would be reflected in lower borrowing cost.

HSBC Bank economist Prakriti Sofat felt that the aggressive move clearly indicated growth concern.

"The pressure will be on commercial banks to pass the benefit to customers," she said.

With more rate cuts expected and a second stimulus package to be announced soon, the measures will help shore up growth in the later part of the year, she added. - By Rupa Damodaran (Business Times)

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