Bank Negara cuts interest rate in bid to manage economy

PETALING JAYA: Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) today slashed its Overnight Policy Rate (OPR) by 25 basis points to 3%.

The move is seen by many as a proactive measure to address an economy which is slowing.

Malaysia’s economy grew by 4.7% in 2018 and the government maintains an official growth projection of 4.9% in 2019. However, actual growth could disappoint as the economy faces numerous external headwinds and high debt levels.

One of the most critical external factors which the Malaysian economy is facing currently is the impact of the trade impasse between the US and China. Commodity prices such as palm oil are also on the downtrend and this has a telling effect on the economy as palm oil contributes 5% to 6% of the nation’s GDP.

Nazari Ismail, a professor of economics at University Malaya told FMT that the rate cut was to counter a slowing economy.

“Obviously this is a move to counter the possible slowing down in the economy which has been predicted by many quarters. There may be an increase in economic activities in the near future due to this move.

“But since this is also going to be accompanied by increased debt level in the economy, it will also mean there is an increase in the risks associated with debt growth. If household debt increases further, any global economic slowdown will mean more Malaysians will be financially exposed in the future,” said Nazari

Barjoyai Bardai, a professor at Unirazak, told FMT that the policy makers should have waited for the economy to bottom out before implementing a rate cut.

“They should have taken the cue from the US which actually hiked interest rate to rein in liquidity,” said Barjoyai.

According to Barjoyai, the economy was “nearing its bottom”.

BNM said in its monetary policy statement that considerable downside risks to global growth remained, stemming from unresolved trade tensions and prolonged country-specific weaknesses in the major economies, further dampening global trade and investment activities.

It added that although a tightening in global financial conditions had eased somewhat, heightened policy uncertainties could lead to sharp financial market adjustments, further weighing on the overall outlook.