A second bigger-than-expected interest rate cut by Bank Negara highlights a rapidly weakening economy, analysts said today, predicting further rate reductions to avert a recession this year.
Bank Negara yesterday slashed its key overnight policy rate—used by banks to set lending rates—by 75 basis points to 2.5%. The cut was the biggest in a decade and came just two months after the policy rate was lowered by a quarter point to 3.25%.
“The move was certainly unexpected, with market expectations of a 25-50 basis points cut, and could possibly point to a rapidly weakening economic environment,” ECM Libra investment research said in a report.
The government expects 2009 growth to drop to 3.5%, from five% last year. But most analysts said this forecast was too ambitious.
AmResearch said the rate cut was the sharpest reduction since 1998 and would boost lending. It will also help prevent a sharp slowdown in private consumption as it raises the disposable income of consumers by lowering their monthly loan repayments, it said.
However, it predicted the economy to grow only by 0-0.5% this year, with downside risks including a slower US recovery, volatile commodity prices and any geopolitical crisis.
“We think there will be a further cut in interest rates of another 50 basis points before the end of the year because the macro-economic numbers are quite weak,” said AmResearch chief Benny Chew.
Inflation has also eased to 4.4% in December, from a peak of 8.5% in July and August, giving room to Bank Negara to cut interest rates, he said.
Kenanga Investment Bank and AmResearch expect the government to introduce a second stimulus package worth up to RM10 billion to spur growth. The government had earlier said it would inject RM7 billion into the economy this year.
Apart from cutting policy rate, Bank Negara also lowered reserve requirements for banks to two% from 3.5%. It was the second reduction in two months and will release more funds into the financial system.
Meanwhile, Bursa Malaysia said late yesterday it would sharply cut the number of companies in its main share index to 30 from 100 as part of efforts to boost flagging trade. The market plunged 39% last year.
From July 6, the Kuala Lumpur Composite Index will become the FTSE Bursa Malaysia KLCI, it said in a statement, adding that the 30 biggest listed companies in the new index will be the “primary market movers.”