Bank Negara cuts OPR to 2.5% to boost growth

PETALING JAYA: Bank Negara has slashed its overnight policy rate (OPR) by 75 basis points to 2.5%, its single largest cut since the OPR was introduced in April 2004, outlining its growing concern on economic growth.
The ceiling and floor rates of the corridor for the OPR were correspondingly reduced to 2.75% and 2.25% respectively while the statutory reserve requirement (SRR) was also reduced from 3.5% to 2%, effective Feb 1, the central bank said.
“With the heightened downside risks to growth, the magnitude of the reductions in the OPR and the SRR is aimed to be pre-emptive in providing a more supportive monetary environment for the domestic economy,” Bank Negara said in a statement yesterday.
Bank Negara last reduced the OPR in November by 25 basis points to 3.25%, its first cut since May 2006.
The sharper deterioration of the global economy is expected to have a greater impact on the Malaysian economy with the large decline in external demand already seen.
“These developments have also affected labour market conditions. Under these circumstances, the urgent implementation of policy measures will be key towards ensuring the Malaysian economy continues to experience positive growth in 2009,” Bank Negara said.
Inflation continued to decelerate to 4.4% in December 2008, a seven-month low from 5.7% the month before, due largely to lower fuel prices.
The deceleration is expected to continue in line with the weaker demand conditions and lower imported inflation.
Lower inflation essentially allows policy-makers the flexibility to lower rates.
Aseambankers chief economist Suhaimi Illias said the pace of the deterioration on the global front was creating the urgency for the central bank to act aggressively and that he did not expect such large quantum of reductions in both borrowing cost and SRR, which is the amount of reserve capital that banking institutions place with the central bank.
A lower SRR translates into more loanable funds to consumers.
“Its drastic move also seems to suggest that the central bank is done with cutting rates at least for the first half of the year,” he said.
Citi Asia Pacific economics and market analysis vice-president Kit Wei Zheng described Bank Negara’s move as “very bold” and “probably a sign that recession may be hitting home.”
Exports and industrial production have been falling for the past months alongside layoffs and a fall in loan approvals.
The Government is targeting a 3.5% growth this year with certain quarters projecting 2.5%, the lowest growth rate in at least eight years.

tunku : a very good decision by bank negara indeed. not like a moron who increased the interest rate during economic crisis in 97/98. thank God he was sacked otherwise till today we are still owing to IMF big time.