Published October 1, 2008
US crisis may pose risks to growth, says Zeti
Not time to cut rates, says central bank governor

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(KUALA LUMPUR) The US financial crisis is in its early stages and may pose added risks to Malaysia's growth, its central bank head told Reuters in an interview on Monday, though she said that it was not time to cut interest rates.

Ms Zeti: Malaysia has not reached the state where the concern is great enough to consider any relaxation of monetary policy
Bank Negara governor Zeti Akhtar Aziz, who helped shepherd Malaysia through its recovery from the Asian financial crisis a decade ago, said that action in the very early stages of a crisis was crucial to ensuring a recovery.
'This is precisely what is happening now, but on a larger scale than what we saw in Asia 10 years ago,' she said.
She was speaking as US lawmakers prepared to vote on Monday on a US$700 billion government fund to buy bad debt, a step in a process to encourage banks to start lending again to each other.
'This kind of resolution needs to address the root of the problem and it also requires the problem to be addressed comprehensively . . . it has to be addressed on all fronts and this is from our own experience during the Asian crisis,' Ms Zeti said.
Malaysia spurned cash and advice from Washington when it grappled with its own financial meltdown in 1997 and 1998 as the region's tiger economies plunged into crisis due to overvalued exchange rates, persistent current account deficits, speculation in financial markets and dependence on short-term capital flows.
It recapitalised banks and pooled the toxic assets.
'We actually came out of it in the money and in the case of the purchase of the bad assets, we didn't warehouse these assets, we pooled them to enhance the value of these assets and then disposed (of them) and we had a recovery rate of about 60 per cent so we were able to minimise the cost of these operations,' Ms Zeti said.
By issuing bonds and making provisions throughout, that meant that taxpayers now and in the future had not borne the cost burden of the recovery, she said.
Still, some effects of the 1997-98 crisis linger and Malaysia has controls on the offshore market for the ringgit, which Ms Zeti said had limited the potential for speculation against the currency.
There is no chance that controls will be lifted in the current environment, she said when asked if there were immediate plans to revise the rules.
'Not in the near term and we generally introduce new regimes or frameworks during more stable periods which have some degree of predictability rather than periods of great uncertainty,' she said.
Malaysia's central bank is forecasting economic growth to slow from the 6.7 per cent recorded in the first half of 2008 and believes that it will not bounce back until the second half of the 2009.
Inflation is also seen dropping to below 4 per cent year-on-year by the middle of 2009 from 8.5 per cent now, Ms Zeti said.
'The (economic) assessment essentially remains the same, but the issue of growth has become more of a concern because it comes from more than one source, the deflationary effect of higher commodity prices, which has receded to some extent, and the external conditions and then the potential wealth effect (in Malaysia from the US),' she said.
When asked if that meant rate cuts were now on the cards, Ms Zeti said no.
'They (rates) might not be aggressively accommodative, but we have not reached that state where the concern is great enough to consider any relaxation of monetary policy,' she said.
The central bank has been criticised by some economists for holding its benchmark rate at 3.5 per cent since April 2006, through a boom and now a global financial bust.
Even as inflation climbed to 8.5 per cent year-on-year in July and August from 3.7 per cent in May, the bank stood pat, saying that the rise was due to spiking food and oil prices and the removal of fuel subsidies.
After the government cut fuel subsidies in June, petrol jumped by 41 per cent from RM1.72 (72 Singapore cents) per litre and diesel leapt by 63 per cent from RM1.58. -- Reuters