Thursday 28 Mar 2024
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KUALA LUMPUR (Aug 8): In the last seven months, Bank Negara Malaysia (BNM) has slashed the overnight policy rate (OPR) by 125 basis points (bps) to a record low of 1.75%. The last time we saw a sharp cut in interest rates was during the 2008-2009 global financial crisis. Back then, it was reduced by 150bps to 2% in four months. It then took the central bank close to 1.5 years after it first cut rates to gradually hike rates again.

Slightly over a decade after the last financial crisis, we now have the health pandemic-induced economic crisis that has sparked bigger-than-before amounts of fiscal stimulus and monetary policy rate cuts that are necessary to revive the economy.

Economists expect the OPR to start rising in the second half of 2021 (2H21) when the economy demonstrates a firmer growth in 1H21.

However, the resurgence of coronavirus cases globally just as the economy is seeing signs of bottoming is casting doubt on that firmer economic growth everyone is longing for.

Will a resurgence take another toll on the global economic recovery? How long can we expect the historic low interest rates to stay?

It is a matter of the right timing of when the central bank should raise interest rates again. Too early, and it might derail economic growth, while if too late, it could result in distortion in pricing of risk.

Risk tends to be underpriced in a prolonged low-interest-rate environment and this encourages more risk-taking behaviour. This in turn leads to a build-up in asset prices, often too rapidly, that results in the risk of an asset bubble.

In the latest issue of The Edge, we explore how a low-interest-rate environment can positively or negatively affect different stakeholders, and consider the implications if low interest rates are prolonged.

Read more about it in The Edge weekly’s Aug 8 edition.

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