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Malaysia Cuts Key Rate by Most in 10 Years Amid Slump

By Thursday January 22nd, 2009 No Comments

Jan. 21 (Bloomberg) — Malaysia’s central bank cut its benchmark interest rate by the most in more than a decade, exceeding economists’ expectations, as the deepening global recession saps demand for the nation’s exports.

Bank Negara Malaysia lowered its overnight policy rate by three-quarters of a percentage point to 2.5 percent, and reduced the amount of money lenders need to set aside as reserves for a second straight meeting. The size of the reduction was larger than all predictions in a Bloomberg News survey of 19 economists.

The central bank said “urgent implementation” of policies to spur growth was needed to prevent the economy this year from following Singapore and New Zealand into a contraction. Finance Minister Najib Razak is planning a second stimulus package to add to a November 7 billion ringgit ($1.9 billion) plan.

“The pace of deterioration in the global economy is creating the urgency to act more aggressively,” said Suhaimi Ilias, chief economist at Maybank Investment Bank Bhd. in Kuala Lumpur. “The rate cut is aimed at ensuring impactful monetary easing together with the economic stimulus measures announced in November, with the likelihood of additional steps coming some time in this quarter.

Traders bet the ringgit’s depreciation will quicken from the spot level of 3.6165 against the U.S. currency after the rate decision was announced at 6 p.m. in Kuala Lumpur, according to non-deliverable forwards contracts. The currency may weaken to 3.6520 in three months, the contracts showed, from 3.6455 before the decision.

Slowing Inflation

Demand for the Southeast Asian nation’s electronics and commodities has slumped, prompting Citigroup Inc. to predict a recession this quarter. Falling orders at the Malaysian factories of companies such as Dell Inc. and Intel Corp. caused exports to decline the most in almost seven years in November.

Malaysia’s inflation rate fell to a seven-month low of 4.4 percent in December after the government cut gasoline prices seven times since late August, giving the central bank more room to cut borrowing costs.

Inflation will slow further amid “weaker demand conditions and lower imported inflation,” Bank Negara said in the policy statement released today in Kuala Lumpur.

Easing prices allowed Malaysia’s central bank, which avoided raising interest rates earlier last year when others were doing so to tame inflation, to join nations around the world in lowering borrowing costs in November. A quarter-point cut on Nov. 24 was the first since 2003 and accompanied a reduction in the amount lenders need to set aside as reserves.

Statutory Reserves

Bank Negara cut the so-called statutory reserve requirement again to 2 percent from 3.5 percent, effective Feb. 1, according to today’s statement.

“International economic and financial conditions have deteriorated much more significantly in the recent period,” the central bank said today. “The sharper deterioration of the global economy is expected to have a greater impact on the Malaysian economy.

Malaysia’s 2009 economic growth may slow to an eight-year low of 2.5 percent should the government fail to effectively implement the November stimulus package, the Business Times reported Jan. 16, citing Sulaiman Mahbob, director-general of the Economic Planning Unit. The government is forecasting an expansion of 3.5 percent this year.

Central banks from India to Taiwan have also lowered borrowing costs in recent months to spur growth as the U.S., Japan and the euro region slipped into recession.

‘Pre-Emptive’

Today’s cuts are “pre-emptive in providing a more supportive monetary environment for the domestic economy,” Bank Negara said. “The urgent implementation of policy measures will be key towards ensuring that the Malaysian economy continues to experience positive growth in 2009.

Malaysia’s banking system remains “fundamentally sound” and the central bank will seek to ensure access to credit and make sure lower interest rates translate into cheaper borrowing costs, it said.

 

Source : Bloomberg

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