Published February 25, 2009

Malaysia cuts key rate to 2%

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(KUALA LUMPUR) Malaysia's central bank cut its key interest rate yesterday for the third time since last November as it warned that the economy may contract this year.

Bank Negara Malaysia slashed the overnight policy rate - used by commercial banks to set lending rates - half a percentage point to 2 per cent. It also lowered reserve requirements for banks to one per cent from 2 per cent, which will release more funds into the financial system.

Malaysia's economy has been hurt by the protracted turmoil in the international financial markets and slowing global economy, the central bank said in a statement.

Exports and industrial production have declined steeply, private investment has slowed as businesses scaled back their spending and consumer sentiment has been hurt by the weak labour market, it said. 'The domestic economic conditions are expected to continue to remain challenging in the coming quarters with the continued deterioration in the global economy,' the bank said.

'While this has raised the risk of an economic contraction in 2009, the prospects remain intact for an economic recovery once global conditions stabilise given that the economy is not over-leveraged, the financial system remains sound, and the external position is healthy.'

Bank Negara said it would introduce further measures to ensure continuous access to credit and to minimise the impact of the economic downturn on specific groups.

The government has said it may review its 2009 growth forecast of 3.5 per cent. Some economists have predicted Malaysia's trade-driven economy may contract this year. -- AP