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Boost economy with interest rate cut, says economist

With GDP growth reaching only 2.9% in the first quarter of 2023, Bank Negara has been urged to consider reducing its overnight policy rate..

The central bank has steadily raised borrowing rates back to pre-pandemic levels.

PETALING JAYA: Bank Negara has been urged to consider a cut in interest rates to spur economic activity after a low growth rate of 2.9% was registered for the first quarter of this year.

Barjoyai Bardai, an economist with Universiti Tun Abdul Razak, said a reduction in lending rates would increase consumer spending as it would boost their disposable income.

Bank Negara could lower the overnight policy rate to stimulate economic activity, he told FMT.

The OPR, or inter-bank lending rate, influences consumer rates. “It is a tool used by Bank Negara to invigorate the economy,” he told FMT. “When our economy faces challenges, the OPR is lowered to stimulate activity.”

This approach aligns with measures typically adopted during recessionary periods where the primary objective is to facilitate recovery, he said.

He said the country’s economic momentum has been stalled by external factors like the war in Ukraine and rising tensions between the US and China.

“Despite these external factors, our priority should be fortifying our domestic economy. We have just three to four years to capitalise on market opportunities during this upward economic cycle,” he said.

Shankaran Nambiar, an economist with the Malaysian Institute of Economic Research, said the 2.9% growth rate this year was not only lower than expected, “it would not be surprising if it falls further in the third quarter”.

“We need to strike a balance between stimulating the economy and safeguarding against capital outflows,” he said, as raising the OPR will not effectively mitigate external influences.

“Much hinges on the US Federal Reserve’s efforts to reach its 2% inflation target.”

He noted that the increase in borrowing costs typically associated with attempts to lower price rises place undue burden on citizens.

Alternatively, Barjoyai said, BNM could consider lowering the financing rate for specific industries only, such as the food sector. “We can then stimulate activity within these industries, allowing them to regain momentum amidst the ongoing economic upswing,” he said.

On July 6, BNM maintained the OPR at 3%, describing its stance on monetary policy as “slightly accommodative” and “supportive of the economy”.

The central bank had earlier surprised observers in May when it decided to raise the OPR from 2.75% to 3%, returning it to its pre-pandemic level.


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