Events this week: Rate cut decision and GDP numbers

From Bloomberg:

Economists are divided on whether Malaysia’s central bank will lower its benchmark interest rate for a third straight meeting to bolster an economy that probably expanded at the slowest pace in seven years last quarter.

Bank Negara Malaysia may keep its overnight policy rate unchanged at 2.5 percent today, according to 8 of 15 economists surveyed by Bloomberg News. Six expect a half-point cut and one predicts a quarter-point reduction in the decision due at 6 p.m.

Governor Zeti Akhtar Aziz, who cut borrowing costs by the most in more than a decade last month as the global recession deepened, said Feb. 11 the reduction had been “frontloaded” and that the current rate would hold pending further developments. Reports since then show that inflation has eased further and exports fell the most in almost seven years.

“It would be unreasonable for another rate cut this soon,” said Patricia Oh, an economist at TA Securities Holdings Bhd. in Kuala Lumpur. “Ample liquidity and accessibility to loan financing is more crucial at this point of time."

I'd rather have a rate cut than a wasteful stimulus. The more the government gets on spending money, the less chance we have on seeing it. Rate cuts do in fact help by increasing the disposable income by a significant amount.

But the effect is muted due to only recently implementing rate cuts at 3.5%. Another half a percent would more or less raise income by a significant amount. It may be enough to encourage refinancing. A 1.5% percent interest rate cut to 2% for a person with a RM300,000 mortgage on a RM50,000 a year salary is equivalent to a 9% pay increase.

But seeing as how the country is small, and prone to exchange rate risk, any rate cuts will further exacerbate the weakness of the ringgit. The central bank does need to be wary of the value of the ringgit, less we see our savings go downhill. Overall, the world needs to save in order to get out of this mess. If we erode our savings, we will have less powder for growth once the world does get back on its feet.

After saving, only then can we have the capital to make investments once again.