Published November 25, 2008

Bank Negara cuts interest rates

Overnight policy rate cut by a quarter of a percentage point to 3.25%

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(KUALA LUMPUR) Malaysia's central bank cut interest rates for the first time since 2003 and lowered the amount that lenders need to set aside as reserves to help shield the country from a global recession.

Crisis control: Bank Negara's interest rate cut is the first time since 2003; Malaysia now joins nations around the world in cutting borrowing costs and boosting public spending to stimulate growth

Bank Negara Malaysia cut its overnight policy rate by a quarter of a percentage point to 3.25 per cent.

Most economists in a Reuters poll had expected rates to be left unchanged yesterday for the 21st rate meeting in a row, albeit by a narrow margin of six to five.

'The adverse global developments have already affected the Malaysian economy, as evidenced by the slowdown in export performance and lower equity prices,' the central bank said. The rate cut 'is a pre-emptive measure aimed at providing a more accommodative monetary environment'.

Malaysia, which avoided raising interest rates earlier this year when others were doing so to tame inflation, now joins nations around the world in cutting borrowing costs and boosting public spending to stimulate growth amid the global financial crisis. The government expects the economy to expand 3.5 per cent in 2009, the slowest pace in eight years, as exports weaken.

'The recent and current economic conditions have deteriorated significantly, and the outlook points to further weakness,' said Suhaimi Ilias, an economist at Aseambankers Malaysia Bhd in Kuala Lumpur yesterday.

There are signs that Malaysia's labour market is weakening and business activity is slowing, the central bank said.

Sustaining domestic demand is crucial to ensure growth in 2009, it said.

The central bank cut the so-called Statutory Reserve Requirement to 3.5 per cent from 4 per cent, effective on Dec 1, 'to reduce the cost of intermediation', it said.

'The risk to domestic price stability is now substantially reduced,' Bank Negara said. 'Going forward, the lower cost pressures and the slowdown in demand are expected to exert a greater dampening influence on inflation.

'Inflation is, therefore, expected to moderate significantly, particularly in the second-half of 2009.'

Malaysia's inflation slowed to a five-month low of 7.6 per cent in October, and has eased from a 26-year high of 8.5 per cent in August, as slowing global demand caused crude oil and commodity prices to decline in the second half of this year.

Consumer-price gains will slow further as fuel and food prices fall, Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad said on Nov 21.

'All signs indicate that the worst of inflation is behind us, and this would give room for Bank Negara to lower its policy rate, especially since growth concerns are in the limelight,' said Gundy Cahyadi, an economist at IDEAglobal in Singapore, before yesterday's decision.

Malaysia last cut rates in May 2003 to prop up an economy hit by the severe acute respiratory syndrome (Sars) health scare. It last raised rates in April 2006.

The central bank last trimmed borrowing costs in May 2003 when the benchmark, then known as the intervention rate, was lowered to 4.5 per cent from 5 per cent. It introduced the overnight rate as a benchmark in April 2004, without altering the policy bias. -- Bloomberg, Reuters