Bank Negara leaves interest rate unchanged

A statement released by Bank Negara today announces that its OPR (overnight policy rate) will remain unchanged at 3.5%. If OPR sounds Greek to you, it is the benchmark interest rate which the central bank uses for policy direction- it this changes, huhuhu- most interest rates like the BLR your home loan is based on will also change. Reasons for the unchanged rate is here. I have also reproduced Bank Negara's Monetary Policy statement below (please click for bigger size):

A few days ago, someone asked me what I thought the outcome of the BNM monetary policy on the 24th October would be. I casually mentioned 'no change' for the reasons being:

-Inflation is tapering off as we head towards the last quarter of 2008. You raise interest rates to curb inflation because higher interest rates curb money supply the fastest- higher interest rates encourage savings, discourages new loans from being dispensed thus slowing down spending in the economy. When inflation is trending down, BNM does not find it useful to increase interest rates.

-During an economic downturn (that's where we are heading) interest rates are normally reduced by central banks so that more money is circulated in the economy to encourage spending.

Malaysia's economy
Malaysia's economy especially in the last quarter of 2008, technically speaking, is neither inflation nor recession. Inflation is tapering off, and the economy is also growing but growing at the rate which is outside the recession definition. We are neither here nor there and the economy is stagnant. Hence the best monetary position for Bank Negara's monetary policy is 'no change'.

Other central banks in the region

                    Benchmark interest rate
Thailand       3.75% likely to remain unchanged for the rest of 2008
Indonesia     9.50% increased 3 times in 2008!
Vietnam       14.0% increased 3 times in 2008!

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