Published November 26, 2008

More rate cuts to come from KL: economists

Most expect overnight policy rate to fall to 2.75% by March

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(KUALA LUMPUR) Malaysia's central bank, which cut interest rates on Monday for the first time since 2003, may reduce borrowing costs further next quarter as risks to economic growth heighten, economists said.

Ms Zeti: Full effects of financial crisis may only be felt next year

The overnight policy rate, which was lowered to 3.25 per cent from 3.5 per cent, will probably fall to 2.75 per cent by March, according to Aseambankers Malaysia Bhd, JPMorgan Chase & Co and HSBC Holdings plc. CIMB Investment Bank Bhd expects a similar reduction by the end of next year. Central bank governor Zeti Akhtar Aziz, who had held rates steady as Asian neighbours announced cuts last month, said yesterday that the full effects of the financial crisis that has triggered recessions from the US to Japan may only be felt next year.

Sustaining growth is the government's main challenge, Second Finance Minister Nor Mohamed Yakcop said yesterday in Kuala Lumpur.

'Bank Negara Malaysia's focus has shifted decisively in favour of the growth outlook,' Matthew Hildebrandt, an economist at JPMorgan, wrote in a report on Monday. There is a 'risk of further cuts later in the year if the growth outlook deteriorates more than expected' next year.

A slump in the price of crude oil and palm oil, the nation's largest agricultural exports, will put a strain on South-east Asia's third-largest economy, Mr Nor said yesterday.

Malaysia's three-year bonds rose, pushing yields to the lowest level since May last year, on speculation that the central bank will keep cutting rates. The ringgit advanced 0.3 per cent to 3.6215 against the US dollar.

Malaysia's central bank said in its monetary-policy statement late on Monday that 'the global economic and the international financial conditions are expected to continue to remain volatile and uncertain'. The bank will 'undertake the appropriate policy response to avoid a severe economic downturn,' it said.

The central bank will probably cut rates by a quarter of a percentage point at each of its January and February policy meetings, Tai Hui, an economist at Standard Chartered plc, said in a report on Monday. Borrowing costs will probably stay on hold for the rest of next year, he said.

Malaysia's government expects economic growth to slow to 3.5 per cent next year from at least 5 per cent this year.

That's even after a RM7 billion (S$2.9 billion) stimulus package that includes providing funds for homes, public transport and industry. The government also said that it would let workers pay less into their pensions. Mr Nor said yesterday that the measures would translate into 1.6 percentage points of gross domestic product growth.

To free up funds for lending, the central bank also cut the amount of money commercial banks must set aside to 3.5 per cent from 4 per cent. - Bloomberg