Published May 7, 2009

Bank Negara sees H2 recovery for Malaysia

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(KUALA LUMPUR) Malaysia's central bank governor yesterday predicted that the economy will start to recover in the second half of this year and said that cutting interest rates further would not be constructive in shoring up growth.

Ms Zeti: Current interest rates are at an appropriate level

Bank Negara governor Zeti Akhtar Aziz said that exports remained weak, contracting by about 15 per cent in both February and March after a 27 per cent plunge in January. But this was offset by steady domestic demand, robust tourist arrivals and strong loans growth.

Ms Zeti said that second-quarter economic data was 'very much the same as in the first quarter' but expects growth to rebound in the second half with the government's planned stimulus measures totalling RM67 billion (S$28 billion).

'The first half of this year will see a contraction. In the second half, we expect the impact of the fiscal stimulus to take effect, therefore it will support an improvement in the domestic economy,' she told reporters.

Global appetite for Asian exports have plunged, and the government now expects the economy to shrink one per cent this year in a worst-case scenario. Most economists however, expect the country to fall into a deeper recession.

Ms Zeti said that current interest rates, which are already at historic lows, were at an 'appropriate' level to boost growth. 'Continuously lowering interest rates is not constructive as there are limitations to its impact in terms of promoting growth,' she said, reiterating that Bank Negara's focus was to improve access to financing - not lowering cost of financing.

Bank Negara last week kept its overnight policy rate - used by commercial banks to set lending rates - unchanged at 2 per cent after slashing the rate three times since November.

Malaysian government bond yields rose after her comments, which follow the bank's surprise decision last week to hold interest rates unchanged at 2 per cent rather than cut them as most analysts had expected. The yield on the benchmark five-year bond rose six basis points to 3.78 per cent.

Analysts said that the decision signalled a pause in a rate cutting cycle after reductions since last November totalling 150 basis points to support the weakening economy.

'Investors keep on selling bonds and cutting their losses. The market is already speculating that there will be no more rate cuts this year,' a trader said.

The central bank sees the economy this year shrinking as much as one per cent or growing one per cent, although most private sector forecasters say that Asia's third-most trade- dependent economy will decline more than that in the face of the global downturn. -- AP, Reuters