Following the issues that has been raised on interest rates, this statement aims to clarify the current monetary policy stance. Interest rate policy continues to aim to balance the need to maintain price stability and a stable exchange rate while ensuring that productive activity is not undermined. At the current interest rate, this balance is being addressed within the comprehensive set of policies adopted in December 1997 and March this year. In promoting macroeconomic and financial stability and recovery of the economy, Malaysia has relied on a broad spectrum of measures other than interest rates alone.

In the current environment, inflationary pressures need to be contained so as to preserve the domestic purchasing power especially for the medium and lower income groups. Containing inflationary pressures and promoting exchange rate stability are also necessary to rebuild market confidence and maintain international competitiveness.

In essence, interest rates have to be at levels that will allow savers to earn a positive real rate of return. At the current interest rate level, the real rate of return on deposits (after taking into account the expected rate of inflation) is being maintained at levels prevailing before the crisis. This has allowed savings in Malaysia to continue to be efficiently mobilised through the banking system. One of Malaysia’s strengths has been the ability of the banking system to mobilise a significant volume of savings to finance economic activity. Appropriate interest rate levels are also necessary to contain the outflows of funds abroad. Malaysia considers exchange rate stability an important element in the recovery process. In this context, appropriate macroeconomic policy including interest rate policy is important for overall confidence on the economic and financial system.

Bank Negara Malaysia (BNM) recognises that borrowing costs have increased during this period and this has produced strains on the overall economy. While monetary policy had been tightened, several distortions had also emerged in the money market in the earlier part of this year that resulted in lending rates being higher than necessary. Several initiatives were therefore taken to correct these distortions which had resulted in lending rates that exceeded 20%. Following the measures which included the announcement on depositor protection, the reduction in the SRR by 3.5% (with no net addition to liquidity), the requirement of banking institutions to be transparent with their pricing to borrowers, the daily announcement on BNM operations in the money market, as well as the widening the band for SRR compliance (to give greater flexibility in portfolio adjustment by banking institutions), lending rates have now declined to 12-16%.

BNM continues to work with banking institutions to enhance efficiency of the banking system and examine options to facilitate banking institutions to reduce lending rates within the context of the current monetary policy stance. Initiatives have also been taken to provide productive sectors with access to financing at reasonable rates. These include the enhancement of the Small and Medium Industry Fund (RM1.5 billion); Export Credit Refinancing Facility (RM3 billion); Housing Developers’ Facility (RM2 billion); Suppliers, Buyers and Overseas Investment Credit (RM1 billion), Fund for Food (RM1 billion) and Petty Traders and Hawkers Fund (RM500 million.) Funding is also being provided by external agencies such as the EXIM Bank of Japan (US$300 million), World Bank (US$1 billion) and Islamic Development Bank (US$200 million) for social safety net projects and to reduce the impact of the adverse regional developments on the vital segments of the economy.