Malaysia Cuts Benchmark Interest Rate for First Time Since 2003

By Stephanie Phang

Nov. 24 (Bloomberg) -- Malaysia’s central bank cut interest rates for the first time since 2003 and lowered the amount lenders need to set aside as reserves to help shield the Southeast Asian economy from a global recession.

Bank Negara Malaysia cut its overnight policy rate by a quarter of a percentage point to 3.25 percent, it said in a statement in Kuala Lumpur. The decision was predicted by seven of the 17 economists surveyed by Bloomberg News. One expected a half-point cut and the rest forecast no change.

“The adverse global developments have already affected the Malaysian economy, as evidenced by the slowdown in export performance and lower equity prices,” the central bank said. The rate cut “is a pre-emptive measure aimed at providing a more accommodative monetary environment.”

Malaysia, which avoided raising interest rates earlier this year when others were doing so to tame inflation, now joins nations around the world in cutting borrowing costs and boosting public spending to stimulate growth amid the global financial crisis. The government expects the economy to expand 3.5 percent in 2009, the slowest pace in eight years, as exports weaken.

“The recent and current economic conditions have deteriorated significantly, and the outlook points to further weakness,” said Suhaimi Ilias, an economist at Aseambankers Malaysia Bhd. in Kuala Lumpur today.

There are signs that Malaysia’s labor market is weakening and business activity is slowing, the central bank said. Sustaining domestic demand is crucial to ensure growth in 2009, it said.

The central bank cut the so-called Statutory Reserve Requirement to 3.5 percent from 4 percent, effective Dec. 1, “to reduce the cost of intermediation,” it said.

Inflation Eases

“The risk to domestic price stability is now substantially reduced,” Bank Negara said. “Going forward, the lower cost pressures and the slowdown in demand are expected to exert a greater dampening influence on inflation. Inflation is, therefore, expected to moderate significantly, particularly in the second-half of 2009.”

Malaysia’s inflation slowed to a five-month low of 7.6 percent in October, and has eased from a 26-year high of 8.5 percent in August, as slowing global demand caused crude oil and commodity prices to decline in the second half of this year. Consumer-price gains will slow further as fuel and food prices fall, Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad said Nov. 21.

“All signs indicate that the worst of inflation is behind us, and this would give room for Bank Negara to lower its policy rate, especially since growth concerns are in the limelight,” said Gundy Cahyadi, an economist at IDEAglobal in Singapore, before today’s decision.

Rate History

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

Bank Negara has kept its benchmark rate unchanged since raising it by a quarter-point to 3.5 percent in April 2006. The central bank last trimmed borrowing costs in May 2003 when the benchmark, then known as the intervention rate, was lowered to 4.5 percent from 5 percent. It introduced the overnight rate as a benchmark in April 2004, without altering the policy bias.

Earlier this year, Bank Negara had held off from raising rates to cool inflation as challenges to Prime Minister Abdullah Ahmad Badawi’s leadership threatened to hurt consumer confidence and economic growth. Political tension has eased after opposition leader Anwar Ibrahim missed his target of toppling the government by mid-September, and Abdullah agreed on a date to hand over power to his deputy, Najib Razak.

Lower borrowing costs may help companies such as Tenaga Nasional Bhd., Malaysia’s state-controlled power utility, survive the economic slowdown.

Tenaga, which predicts electricity demand will grow at a slower 4 percent pace in the year ending Aug. 31 from 6.1 percent a year earlier, had to postpone a plan to build a new headquarters that may cost as much as 350 million ringgit ($96 million), the Business Times reported in Nov. 18.

To contact the reporter on this story: Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net