Will Malaysia raise Interest Rate?

ALL eyes will be on Bank Negara’s monetary policy committee meeting next week as to whether the overnight policy rate will be raised. As the arguments for a rate hike in Malaysia have been laid down, the expectation is that a 25-basis point hike is in store.

That move will run against what the US and EU have been saying or doing, but there seems to be a growing divergence between conforming with the norm and acting on each country’s individual needs.

The US Fed has said there is no need to lift rates to curb risks in asset bubbles. That means as long as the financial system is strong enough, investors will choose what to do with asset prices.

In Europe, the benchmark interest rate is negative to encourage people to spend. Savers are penalised as there is a need in the continent to get spending moving to spur economic growth.

The situation in Malaysia is different. The economy grew by 6.2% in the first quarter and household debt continues to rise. Raising interest rates will be seen as a tool to control the buildup in household debt as that problem has been alluded as a financial imbalance in thebanking system.

Low interest rates in Malaysia have not only lifted asset prices and also contributed to a build-up in household debt.

By hiking interest rates, Malaysia will be dealing with its own set of problems. There is a need to address the debt build-up because postponing it will only lead to the creation of a debt trap in the country.

That warning is what the Bank of International Settlements issued recently, as they too say that super low interest rates will lead to imbalances in the future.

Source: The Star (05 July 2014)

Posted on 2014-07-07 16:11:13