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February 25, 2009

Recession fears prompt Malaysia to slash key rate again

Malaysia cut its key interest rate on Tuesday for a third straight meeting and pledged more measures to ensure access to credit and to ward off recession risks plaguing the export-dependent country.

Bank Negara Malaysia (BNM) cut its key overnight policy rate by 50 basis points to 2.00 percent.

The cut was expected by six of 13 polled economists, nearly a month after slashing it by 75 basis points.



The bank also cut its statutory reserve requirement by 100 basis points to 1 percent.

"We think that to pursue an easier monetary stance now would be appropriate for Malaysia as unlike some countries in the region, its huge current account buffer would afford them the room to cut rates, without the fear of triggering currency weakness and higher inflation expectations," Goldman Sachs said in a note.

Central banks in the region are slashing rates to deal with evaporating global demand that has led export-dependent Asian countries to their worst economic performance in years.
Neighbour Thailand, whose economy suffered its biggest contraction on record in the fourth quarter, is expected to cut its key rate by 50 basis points to 1.50 percent, joining Hong Kong and Taiwan with the lowest rate in the region.

Malaysia's economy is expected to grow by just one percent in the fourth quarter in which exports fell in all three months.

Several economists see the country entering recession this year for the first time since 2001. Fourth-quarter economic data will be released on Friday.

With three consecutive meetings where monetary policy was eased, analysts say focus is shifting more to fiscal policy to play its part in easing Malaysia's economic pain.

Malaysia's government is set to announce its second stimulus package, dubbed the mini-budget, next month after a $2 billion package in November which has been criticised for being implemented too slowly and having no tangible effect on the economy.

Deputy Prime Minister Najib Razak said the government is looking at possible funding sources for the second package but hasn't yet agreed on a figure, although a junior minister said recently it could be around 30 billion ringgit ($8.20 billion).

"Even as we expect the government to dish out a significant stimulus package on 10 March, it is unlikely to keep economic growth in positive territory for 2009 due to softer domestic demand and dismal exports," said Standard Chartered's Alvin Liew.

"There remains work to be done for the central bank and we expect another BNM 50bps rate cut in the second quarter of 2009. But for now people will be looking forward to the probably not-so mini budget."

Malaysian exports fell 14.9 percent in December and are officially expected to fall by up to 4 percent this year.

Asian countries such as Singapore, Taiwan, South Korea and Malaysia rely on external demand, currently absent, to mop up their exports, which are worth 100 percent of Malaysia's gross domestic product and 70 percent of Singapore's.

With the financial crisis gripping the key markets of the United States and Europe, and domestic demand also flagging due to rising unemployment, exports are not expected to recover anytime soon.
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