Pressure on BNM to cut rates

Bank Negara Malaysia (BNM) will come under renewed pressure to lower interest rates again next year, as there are increasing signs of a decline in domestic demand, economists said.

Malaysia Rating Corporation Bhd (MARC) chief economist Nor Zahidi Alias said there was an increasing possibility that BNM would lower the overnight policy rate (OPR) again in the immediate term, given that the global economy had decelerated sharply in recent months.

"The reduction in the OPR will, to some extent, cushion our economy against any sharp decline in the business and consumer sectors. This is critical as there are now signs that businesses and consumers are being affected by the slowdown of the domestic economy," he told The Edge Financial Daily via email.

Nor Zahidi expected the OPR to be trimmed by another 50 basis points before end-2009, and said a more aggressive monetary policy response would be helpful for the economy, considering that the government’s fiscal position is constrained by a relatively high level of budget deficit.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng said he expected BNM to cut interest rates by another 25 basis points in its next policy meeting on Jan 21, 2009, adding that BNM’s move to lower interest rates would be gradual, depending on how sharp the decline in domestic demand turned out.

At its last meeting on Nov 24, BNM slashed its OPR for the first time since April 2006 by 25 basis points to 3.25%, as the deterioration in the global economy had begun to affect domestic demand. Last Wednesday, Hong Kong lowered interest rates by 100 basis points to a record low of 0.5%, following the US Federal Reserve’s move to cut rates to near-zero. The Bank of Japan also cut its key rate to 0.1% and pumped capital into its distressed economy.

"However, cutting interest rates is not the only tool to encourage spending among consumers and businesses. The government will also need to encourage spending via other means, including increasing expenditure," Yeah said.

Nor Zahidi said ideally, it would be helpful to have a bigger stimulus package to support consumer spending and implement projects with higher multiplier effects.

He said although the introduction of the RM7 billion stimulus package was a step in the right direction, the package only represented 1% of the country's nominal gross domestic product (GDP), and hence, was unlikely to have any significant impact on the overall economy.

Nevertheless, Nor Zahidi said the country would have to bear in mind that its budget deficit was expected to remain close to 5% of GDP for the second year in 2009, and the government's fiscal condition would likely deteriorate going forward, given that crude oil prices had collapsed 75% form its peak in July.

Hence, he said it was critical to ensure that the implementation of the current stimulus package was not delayed and there was some stability in the labour market, which was being affected by the global economic slowdown.

However, Yeah said he was not so concerned with the country's budget deficit exceeding 5%, as there was a need for government to spend more to prop up domestic demand.

"The government is already planning to introduce a strategic package, which will be announced next year. We think it should be a broad-based stimulus package, comprising both fiscal stimulus and non-fiscal strategies such as more market liberalisation steps to support domestic demand," he said.

Yeah said given the current state of the global economy, the country's GDP is expected to hover at about 3% to 3.5% for 2009, but said that with the higher government spending and quick implementation of the stimulus package, the country would have a softer landing compared with other countries that were already slipping into recession.

The US has been in recession since December 2007, while Japan, Hong Kong, Singapore, Germany and Italy are now in recession after registering two consecutive quarters of economic contraction.

Nor Zahidi said he expected Malaysia's GDP growth forecast for 2009 to remain at 3.5%. "However, with recent developments in the global economy, we do admit that there is an increasing downward risk to our forecast."

The Edge 22 Dec 08