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Rates still need to support recovery

SINGAPORE: Malaysia’s interest rates still need to support the country’s economic recovery, Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz said on Oct 7.

“At this point in time, we do not see the risk of inflation or of asset bubbles,” Zeti said in an interview in Istanbul. “We will look at all the risks, and what are the risks to the sustainability of the recovery and therefore interest rates do have to continue to support that process.”

Australia’s central bank on Oct 6 became the first among the Group of 20 nations to raise interest rates since the height of the global financial crisis, as the world emerges from its recession. Malaysia’s central bank kept borrowing costs unchanged in August after the economy’s contraction eased in 2Q.

A recovery in investment activity by both large and small companies is an important indicator for a sustained economic recovery around the world, Zeti said. Interest rates do need to be “normalised” to levels that aren’t “very high” and can still support growth, she said.

“It’s important to not prematurely exit from this strategy of supporting growth,” she said. “Interest rates still need to be supportive of growth going forward but they also need to be normalised, especially in those countries that are near zero because it results in other distortions to the system if it’s for too long a period.”

Australia’s Reserve Bank Governor Glenn Stevens unexpectedly boosted the overnight cash rate target on Oct 6 by a quarter percentage point to 3.25%, saying the justification for a benchmark rate at a half-century low “has now passed”.

Bank Negara Malaysia will look at “potential distortions” that could emerge from a very low interest rate environment, Zeti said. Even so, the country’s borrowing costs are “not near zero, and so we have the potential to still remain supportive,” she said.

Easing inflation allowed Bank Negara Malaysia to cut its benchmark interest rate from 3.5% in mid-November to a record low of 2%. Gross domestic product shrank a less-than-expected 3.9% in 2Q from a year earlier, easing from a 6.2% drop the previous quarter.

The contraction in 3Q will be smaller than that of the previous three months, Zeti said. The economy will perform better than the government’s current forecast for a contraction of as much as 5% this year, she added.

The 2009 inflation rate will probably be lower than the current estimate, Zeti said. Consumer price gains may average between 1.5% and 2% this year, she said in May.

The government has unveiled two stimulus plans worth a combined RM67 billion in the past year to revive growth. – Bloomberg LP

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