AmInvestment Management Sdn Bhd today reportedly said it expects Bank Negara Malaysia to reduce its overnight policy rate (OPR) by 25 basis points (bp) in the second quarter due to a strong ringgit and mild inflation rate. FinanceTwitter agreed that stronger ringgit will only spells disaster to Malaysia especially at this critical time when the government has been boastful about the export value and how the surplus was registered continuously.
Traditionally, Malaysian Bank Negara (Central Bank) has been using the interest rate of U.S. as the yardstick in order to balance the fund-flows. So, how much or will the Central Bank be reducing the OPR will be watched by all analysts with great interest. Ben Bernanke was hoped to announce the magic-word of interest-rate reduction since he took over from Alan Greenspan but he has not press the button yet.
On Malaysia side, the government is definitely pressured to ease the interest rate in order push the implementation of the Ninth Malaysia Plan. A lower interest rate will enable projects’ costs under the Malaysia Plan cheaper for developers, which in this case will most likely be awarded to companies which are closely related to the ruling party, UMNO. As with the previous mega government projects however, any subsequent new projects will definitely run beyond the initial budgets and the government will normally be glad to increase allocation for such over-run projects.
Another strong reason for interest rate reduction is the high-profile of IDR (Iskandar Development Region) trumpeted by Malaysia premier Badawi. Already skeptism is running high on the dream to turn the area into another Hong Kong. With higher interest rate, the risk of developers (mainly political-linked companies) hitting the wall is higher – lower cost of doing business is vital to survive.
The reduction in OPR hopefully will create the excitement in property sectors as lower rate will translate to lower cost of ownership to house buyers. Affortability is the key word in property sector. With speculation of early general election being called end of this year (2007), a lower interest rate will most likely help to win over some voters who have been burdened by the government’s decision to increase the fuel-price recently. You can only expect more good news and goodies to be announced to project a feel-good economic environment for the year.
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