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Impact of Low Interest Rate

From: AFP
Date: 07 May 1999
Time: 04:37:30

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Economist says Malaysia's key short-term rate nearing lower limits

KUALA LUMPUR, May 7 (AFP) - Malaysia's short-term interest rates are nering their lower limits after being pushed down by the central bank, and have little room to fall further, an economist said Friday.

"From now on, we must be very cautious. We do not have much scope to go lower," former finance ministry deputy secretary-general Ramon Navaratnam told AFP, cautioning of the negative impact of low interest rates on savings.

The inflation rate is running at about three percent and the interest rate on bank deposits at about six percent, he said.

"There is not much of margin for rates to go down.

"Savings is strong. We must not erode it," said Navaratnam, an advisor to the Sungeiway Group, a business group with interests in construction and hotels.

Malaysia's central bank on May 3 trimmed a key rate by half a point, as analysts predicted further cuts ahead to loosen credit and spur economic recovery.

Bank Negara Malaysia governor Ali Abul Hassan Sulaiman had said the reduction in the three-month intervention rate from 6.5 to 6.0 percent reflected the "moderating trend in the expected inflation rate."

He said it would help sustain "recent positive developments" in the economy and result in a further easing of lending rates to "support commercial activity."

Bank Negara's intervention rate largely determines interbank lending rates, which in turn are the basis on which commercial banks calculate their lending rates.

The central bank has been easing monetary policy since August, with its three-month intervention rate progressively reduced since then from a high of 11 percent.

Navaratnam warned that if rates fell too low, they may make manufacturers complacent and block an industrial switchover to higher technology.

"Industries should not take for granted that there is much scope to lower rates. Although lower interest rates may help industries to recover, we must prevent them from becoming complacent," he said.

Malaysia plunged into its first recession in 13 years in 1998, but the government predicts the economy to edge back into the black this year and grow 5.0 percent in 2000.

Last changed: May 07, 1999