Key Interest rate at Appropriate level

From the Business Times:

BANK Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz said the key interest rate is at the appropriate level now but the central bank would not rule out future cuts.

"Right now, under the scenario that we have expected, this is the appropriate interest rate level. But, we cannot rule out in this very uncertain world what will happen in the external environment.

"We see our domestic economic conditions being stable and certain sectors show trend towards positive growth, but the external environment remains very uncertain," Zeti said in Kuala Lumpur yesterday.

The overnight policy rate (OPR), which banks use to set their lending rates, is currently at 2 per cent, after Bank Negara cut it by 150 basis points between November and April.

The central bank is now more focused on the availability of loans.

" ... what is very encouraging is that the growth of lending has continued to be sustained in the region of 10 per cent," she added.

Zeti also said that the country's second-quarter economic growth will be similar to the first, and expects the economy to improve in the second half and next year, partly driven by the government's stimulus package.

The Malaysian economy contracted 6.2 per cent in the first quarter.

"It's being aggressively implemented and we expect to see the effects in the third and fourth quarters. It will be important in sustaining domestic demand," she explained.

Lower interest rates work best when people can refinance. A large change in the magnitude of interest rates does a have a profound effect on the economy. I'm not too sure if a 3.5%-2% interest rate will be enough. There may be more loan growth, but no re-finance loan growth which will effectively give people extra income. What's the point of lower rates if the magnitude of the rate change isn't big enough to warrant refinancing a loan?