Bank Negara Cuts Key Interest Rate to 2.5pc.

MALAYSIA's central bank cut its benchmark interest rate for a second straight meeting as easing inflation allowed it to focus on sustaining economic growth amid the deepening global recession. Bank Negara Malaysia lowered its overnight policy rate by three-quarters of a percentage point to 2.5 per cent, it said in a statement in Kuala Lumpur today.

The size of the reduction was larger than all predictions in a Bloomberg News survey of 19 economists, where seven expected a quarter-point cut and the rest forecast the rate to be lowered by 50 basis points.

Malaysia’s 2009 growth will probably miss the government’s 3.5 per cent forecast, adding pressure on policy makers to boost spending and cut borrowing costs, the Malaysian Institute of Economic Research predicts.

Finance Minister Datuk Seri Najib Tun Razak is planning a second stimulus package to add to a RM7 billion (US$2 billion) plan unveiled in November. “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.”

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.

Slowing Inflation

Inflation fell to a seven-month low of 4.4 per cent in December after the government cut gasoline prices seven times since late August. 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 November 24 was the first since 2003 and accompanied a reduction in the amount lenders need to set aside as reserves. “International economic and financial conditions have deteriorated much more significantly in the recent period,” Bank Negara 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 per cent should the government fail to effectively implement the November stimulus package, the Business Times reported January 16, citing Sulaiman Mahbob, director-general of the Economic Planning Unit. Central banks from India to Taiwan have also lowered borrowing costs in recent months to spur growth as the US, Japan and the euro region slipped into recession. - Bloomberg