As global economic growth weakens significantly, Bank Negara believes Malaysia will not join the list of countries that have slipped into recession.
Governor Tan Sri Dr Zeti Akhtar Azis said the country's sturdy domestic demand, which has driven the key services sector, along with policies already in place, would be enough to see the country continue to post growth this year and next.
She said growth for 2009 was forecast at between 5% and 5.5%, and while some moderation might take place in the fourth quarter, the economy was projected to expand by between 3.5% and 4.5% in the final quarter of this year.
"Usually, activities in the fourth quarter tend to be stronger but we need to see consumption activity sustained during that period," she told the media yesterday.
In shooting down talk of Malaysia entering into a recession, Zeti said the reason for slower growth had been the external sector.
"Our financial institutions continue to function and lend and we have ample liquidity in our financial system," she said.
The central bank governor said prices were moderating and the reversal should help investment activity which had been dampened by high costs.
Zeti said there were no large scale retrenchments in Malaysia and the position of households was still stable. "We are also an economy that does not have an asset bubble.
"All these elements enhance our prospects of sustaining growth even though it may be more a moderate growth. It certainly enhances our prospects and reduces the risk of a recession in our economy," she said.
Should the situation deteriorate faster than predicted, the central bank and the government have, at their disposal, fiscal and monetary measures to counter the situation.
"We are also monitoring the policies taken by crisis-affected countries and how effectively they will be implemented and their results," she said.
Zeti said the central bank still had room for further adjustments on interest rates should the need arise but added that the current overnight policy rate was "very low and it is seen as very supportive of growth".
"We do not see the applications for loans slowing significantly, therefore it has not been a factor inhibiting borrowing trends."
Zeti said the cut in interest rates by countries such as China recently was to promote growth or to avoid a major economic downturn.
"The priority now is to avoid a major economic downturn because the cost of this will be very high," she said.
"If we have a major economic downturn in any part of the world, it would involve the closure of businesses, defaults and rise in unemployment and all these will result in a prolonged recession."
On inflation, Zeti said it had peaked at 8.4% and the rate was expected to moderate in the first half of 2009 before dropping more significantly in the second half of next year.
