2020-07-10 12:39:00  2304742
Interest cut is not cure-all

Sin Chew Daily

The country's economic outlook is gloomy as a result of the coronavirus outbreak. To tackle the impact from the virus, Bank Negara cut the overnight policy rate (OPR) by another 25 basis points to an all-time low of 1.75%.

It was the central bank's fourth attempt this year to slash the OPR, the most recent on May 5.

BNM has cut a total of 125 basis points since January this year, but as the outlook remains murky, economists have expected the central bank to cut the rate further this September.

Cutting interest rate to stimulate the economy is not exclusive to Malaysia. Many other countries have done the same to mitigate the impact of economic slowdown and the coronavirus. Thailand, for instance, has cut the interest rate three times this year, while South Korea slashed the benchmark interest rate by 25 basis points in May to a historical low.

Many countries have introduced more relaxed monetary policies to deal with their economic plight. Cutting interest rate is one way of regulating the economy.

That said, given the overall environment at this juncture, the justification of a rate cut is yet to be substantiated.

Generally speaking, interest rate cut means lower cost of borrowing which will help boost corporate financing. At the same time, lower interest rate will also encourage people to buy properties and this will stimulate the local housing market.

Additionally, due to lower savings rate, people will tend to spend and invest instead of putting their money in the bank, thus releasing more cash into the market to revive the otherwise stagnant market.

Indeed under normal circumstances interest rate cut should help stimulate economic development, but under the still unpredictable new normal because of the global pandemic, the effects of interest rate cut could be very limited.

No country can be spared from the havoc wreaked by the virus. Even though the situation here in Malaysia is largely put under control, bear in mind that threats from the coronavirus are still rife elsewhere on this planet, with over 12 million confirmed cases reported so far, including more than 60,000 new cases in the United States this Wednesday. This shows the virus is still far from vanishing. Such a dismal outlook will invariably hurt investment sentiment.

Meanwhile, political turmoil in the country has shown no signs of ebbing since the change of federal administration in March, adding a factor of uncertainty while dampening the confidence of investors.

Against the backdrop of such hostile domestic and global factors, many have adopted a very cautious attitude when it comes to spending or investment.

The repeated rate cuts by Bank Negara shows that the country's economy is now facing very severe challenges. As mentioned earlier, rate cut is not the cure-all to fix our problems. We cannot expect too much from it given the broadly negative sentiment here and abroad. The government must combine this with other measures such as improved fiscal policies and stimulus packages to deliver the country out of the current doldrums.

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