KUALA LUMPUR (Jan 29): The Institute for Democracy and Economic Affairs (IDEAS) said the suggestion to lower the interest rates on housing loans by the government would hide issues faced by the local property market.

The proposal was made on Thursday (Jan 25), the same day Bank Negara Malaysia (BNM) announced a 25 basis points hike in the overnight policy rate (OPR) to 3.25%.

“Artificial lowering of the interest rate will hide the fact that a speculative wave and a supportive credit policy took place, and will result in further supporting the growth of a market which probably reached its saturation a few years ago and therefore now has to experience a readjustment crisis,” said IDEAS senior fellow Dr Carmelo Ferlito in a statement today. 

He said the interest rate is a price that communicates the present or future orientation of economic actors, which helps participants coordinate their plans without the need for any central coordinating authority or coercion. 

He went on to say the fixing of interest rates by a monetary authority leads market participants to make wrong choices. 

“The world economy experiences a strange situation whereby, even in those countries where the central role of prices emerging from free market forces interplay is understood, one of the key signals for the economic system, the interest rate, is centrally fixed by a monetary authority. Such a system easily drives market participants toward wrong choices,” Ferlito said. 

He said the best solution to mitigate speculative investments and malinvestments — such as what happened in the Malaysian property market — would be to abolish political power and the central bank’s authority over the interest rate and leave it to market forces. 

“Only in this way, investment decisions would be based on a signal consistent with the intertemporal preferences of market participants,” Ferlito said.

On Thursday, Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi Zahid proposed a reduction of interest rates on housing loans to ease the burden of housebuyers, which was discussed at a committee meeting on housing issues. 

Ahmad Zahid said high interest rates was among reasons behind the 3,605 unsold housing units in the RM250,000 to RM500,000 range last year. Based on a comparative study, he said Malaysia’s interest rates are in the mid-range among the developed and developing countries. 

Besides the issue of interest rates, the committee also discussed the temporary suspension on new housing projects valued at RM1 million and above, issues surrounding the People’s Housing Project and BNM’s proposal to develop integrated databases and implement centralised initiatives for affordable homes. — theedgemarkets.com

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