KUALA LUMPUR: Bank Negara Malaysia (BNM) will formulate a new interest rate framework as the base lending rate (BLR) has become “less relevant”.
“Given the highly dynamic environment, it is important to ensure that this reference rate continues to be relevant. In the recent period, there have been indications that the BLR as a reference rate for the pricing of loans has become less relevant now,” governor Tan Sri Dr Zeti Akhtar Aziz told reporters after the launch of the Asian Banking School here.
She said BNM will issue a paper outlining the new reference rate framework to the industry in early January, as part of a consultative process to discuss the matter.
“We have a concept paper and a proposal of what the new reference framework should be and we will give it to the industry to examine and give feedback, and introduce it probably later during the year.
“The new framework will be more related to the funding costs especially the marginal funding costs, which is how banks are actually pricing their loans,” Zeti said.
She explained that the rate banks use in determining the interest rate is their marginal funding cost — the cost of funds that banks use to lend — which is less than the BLR.
“In the last few years, the average lending rate is very much less than the BLR, and this is because the components of the BLR do not just reflect banks’ funding costs, but also overhead costs.
“Therefore the BLR is not being used as a reference rate. Our point is, we need to review it given that it’s less relevant,” Zeti said, adding that the new framework will be more pertinent to how banks are actually pricing their loans.
Zeti said a good reference rate needs to serve three important roles.
“It needs to allow banks to vary the floating lending rates to reflect changes in funding costs, reflect changes in monetary policy and be the basis for the pricing of retail loans,” she said, adding that this will not impact the level of interest rates.
|Zeti: We have a concept paper and a proposal of what the new reference framework should be.|
“It has nothing to do with the level of interest rates, it’s just that we do not want to have an irrelevant framework because it should reflect the cost of funds and it should be a basis for the pricing of floating rate loans.”
Kenanga Investment Bank head of research Chan Ken Yew said changing the benchmark interest rate framework will have a neutral effect in the short term.
“The investment community actually places more focus on the effective lending rate rather than the benchmark rate itself,” he told The Edge Financial Daily.
A banker said the BLR has lost its relevance as a benchmark as a minimum rate charged to the banks’ most creditworthy customers. This is largely due to stiff competition since the deregulation of the BLR and the overnight policy rate takes precedence.
“The question now is, how do you make the BLR more relevant?
“Should BNM decide on setting a fixed rate, it will defeat the purpose of having a market economy. It should let the market decide by making the rate more flexible rather than fixing it,” he said.
On whether BNM will raise interest rates to curb potential inflation, Zeti said the central bank will assess based on the reasons behind the increase in prices.
“We have to make a very careful assessment as to what the monetary policy decision will be. As I mentioned before, if it’s demand-induced inflation, this would prompt a review of the monetary policy rate or level of accommodation that we have in place.
“But if it’s due to rising costs and we do not see second round and knock-on effects on other prices rising, then the assessment will be that the impact of this price increase will be transitory and that it will normalise after a period of time and therefore not warrant addressing it through interest rates,” she said.
This article first appeared in The Edge Financial Daily, on December 19, 2013.