Credit Herald

Malaysia’s interest rates still need to support the country’s economic recovery, central bank Governor Zeti Akhtar Aziz said today.

“At this point in time, we do not see the risk of inflation or of asset bubbles,” Zeti said in an interview in Istanbul today. “We will look at all the risks, and what are the risks to the sustainability of the recovery and therefore interest rates do have to continue to support that process.”

Australia’s central bank yesterday became the first among the Group of 20 nations to raise interest rates since the height of the global financial crisis as the world emerges from its recession. Malaysia’s central bank kept borrowing costs unchanged in August after the Southeast Asian economy’s contraction eased in the second quarter.

Bank Negara Malaysia will look at “potential distortions” that could emerge from a very low interest rate environment, Zeti said. Even so, the country’s borrowing costs are “not near zero, and so we have the potential to still remain supportive,” she said.

Easing inflation allowed Bank Negara Malaysia to cut its benchmark interest rate from 3.5 percent in mid-November to a record low of 2 percent. Gross domestic product shrank a less- than-expected 3.9 percent in the second quarter from a year earlier, easing from a 6.2 percent drop the previous quarter.

The contraction in the third quarter will be smaller than that of the previous three months, Zeti said today. The economy will perform better than the government’s current forecast for a contraction of as much as 5 percent this year, she said.

Stimulus Plans

The 2009 inflation rate will probably be lower than the current estimate, Zeti said. Consumer price gains may average between 1.5 percent and 2 percent this year, she said in May.

Malaysia’s government has unveiled two stimulus plans worth a combined 67 billion ringgit ($20 billion) in the past year to revive growth as the worst global slump since the Great Depression hurts exports of Malaysian Pacific Industries Bhd. semiconductors and other goods.

Malaysia’s ringgit has risen 5.1 percent in the past six months against the dollar.

“If Malaysia’s fundamentals continue to remain good, then obviously the currency would become stronger,” Zeti said. The central bank wants to see “orderly” movements in the exchange rate, and doesn’t have a target level for the ringgit, she added.

Malaysia plans to allow the ringgit to be traded overseas after the country’s financial markets become more developed, Zeti said.

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