World Economy

Indonesia Growth Above Expectations

Indonesia Growth Above ExpectationsIndonesia Growth Above Expectations

Bank Negara Malaysia’s recent cut in its key interest rate for the first time in seven years may set a precedent for a more dovish or aggressive monetary policy to boost economic growth in the wake of heightened risk in major economies.

The surprise rate cut under new Governor Muhammad Ibrahim, who took office on May 1, was perceived as setting a different path from the previous norm, Bernama reported.

Previously, policymakers moved along market expectations. This time, some economists, analysts and market players saw their perspectives being challenged but have accepted that the cut is a pre-emptive measure by Bank Negara to stimulate economic growth.

The Overnight Policy Rate, or key interest rate, had been unchanged at 3.25% for almost two years since it was raised by 25 basis points on July 2014.

At the height of the 2008-2009 global financial crisis triggered by the subprime housing woes in the United States and failures in risk management and corporate governance of highly-leveraged leading financial institutions in US and Europe, the OPR was reduced three times at Bank Negara’s Monetary Policy Committee meetings.

After a cut of 25 basis points on November 24, 2008, the OPR saw further cuts at two MPC meetings in 2009, bringing the rate to 2% on February 24, 2009.

  Window of Opportunity

In a recent interview Muhammad maintained that the cut in the OPR by 25 basis points to 3% on July 13 was a preemptive move to ensure the economy remained on a steady growth path.

The governor said the window of opportunity had presented itself and Bank Negara took it in its stride to create an enabling environment so that financing would be healthy, economic activities prosper and people were able to generate more wealth and income.

The rationale for the rate cut, he said, was also premised on inflation which was trending down to a lower-than-expected level. The move, although probably sooner than expected by economists who were anticipating it only next month, came at the time when central bankers in developed countries were taking aggressive stance by slashing interest rates with many adopting ultra-low rates to boost growth and increase domestic consumption.

Muhammad said that Malaysia had the capacity to absorb any exogenous shocks with about RM120 billion ($29.7 billion) excess capital in the banking system. He said reforms introduced since the Asian financial crisis to strengthen the banking sector had been very much fundamental.