volatility of interest rate malaysia 2008 - 2011

7/31/2019 Volatility of Interest Rate Malaysia 2008 - 2011

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Question: Volatility of Interest Rate Malaysia

2008 - 2011

Contents

Acknowledgment 2

1.0 Executive summary 3-4

2.0 Introduction 5-6

3.0 Analysis 7-27

4.0 Recommendation 28-29

5.0 Conclusion 30-31


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ACKNOWLEDGEMENT

Throughout the assignment, we have a better understanding of the volatility of interest

rate in Malaysia. Although we had face many obstacle when doing the assignment, but

we have complete our assignment successfully with the guidance of our Lecturer, Dr.

Datin Dr. Joriah. She had taught us the ways to do the assignment and correct any

mistakes in our assignment. Moreover, we really appreciate the kindness of Datin Dr.

Joriah for willing to spend his precious time with us and provided us with plenty of

information. Thus, we have finished our assignment more easily with his informative

details. We have tried our best to work hard on the project. We all have given high

commitment while doing this project.

Again, we would like to thank the guidance of our lecturer, Datin Dr. Joriah Muhammad

for giving us the chance to obtain the knowledge about financial institutions and markets.

We cant deny that there are a lot of difficulties when we do the assignment such as

conflict that flow from the different idea of each member but through the guideline given

by her, we are able to go through the tough time. Besides, she also gives us support and

helps us in order to finish our assignment on time such as remind us the deadline of the

assignment in class so that we wont forget to pass up our assignment. Thanks for her

caring and patient in guiding us.

Furthermore, we would also like to thanks our tutor, Madam Sarini Aziza for sharing

some useful information in accomplish this assignment. She helps us a lot especially

when we are unclear about the title of this assignment.

Finally, we would like to thank each other for the commitment and cooperation. Even we

have different perspective about the assignment, but we tolerate to each other idea by

taking consideration of each other idea when doing assignment. We are glad that we are

able to finish our assignment on time. Thank you.


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1.0 EXECUTIVE SUMMARY

Malaysia has experienced an economy cycle from year 2008 to year 2011. In the year

2008, Malaysia suffered the subprime crisis began in August 2007 in the USA. This

crisis has many significant effects on the health of our country economy, financial

stability, economy growth and so on.The declines in FDI, foreign reserves, and portfolio

funds, the current account balance dropped significantly. From the above, we can say that

the economy condition in year 2008 is in the combination of recession and high inflation

due mainly to the sharp increase in global food and fuel prices.

As the contraction happened in year 2008 had continued to year 2009 which prompt the

government to take appropriate actions (expansionary fiscal policy) to boost the economy

such as monetary growth came from strong Government spending, financed mainly by

the subscription of Government bonds by the banking institutions. Bank Negara Malaysia

(BNM) had reduced the Overnight Policy Rate (OPR) to 2.00%. As a result of reduced

OPR, Interbank rates of other maturities also declined. In the first-half year of 2009,

Malaysian GDP growth, export, and other economy activities had a poor performance,

and the inflation rate is very high. In the second-half year of 2009, the expansionary

fiscal policy was worked. GDP, export and other economy activities were recovery from

the economy crisis and the inflation rate had a dramatically fall.

In the year 2010, the focus of monetary policy shifted away from the need to avert the

economic downturn, and turned towards balancing the risks to inflation and growth, and

to prevent the build-up of financial imbalances by ensuring that monetary conditions

were appropriate. So, BNM had adjusted upwards the interest rate responded to the

increase in the Overnight Policy Rate (OPR). As a result, average base lending rate

(BLR) and the average lending rate (ALR) of commercial banks were also adjusted

upwards, and the inflation rate was also increase in the year 2010. However, the

performance of Malaysian economy continues experienced a strong resumption of

growth in this year, driven by a robust expansion in private consumption and a rebound

in private investment. Most of the sector experienced an obvious growth during this year.


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So, the economic indicators were signaling that the global recession was receding in the

year 2010.

In the year 2011, The Bank Negara Malaysia (BNM) maintained the overnight policy

rate (OPR) unchanged at 3.00 percent, and held the floor and ceiling rates of the corridor

for the OPR at 2.75 percent and 3.25 percent respectively. Most of the sectors were

remained stable in this year, which had only a slight fluctuation. The base lending rate

(BLR) was quite raised in 2011 with an average as compared to year 2010. But Average

Lending Rate (ALR) dropped in year 2011 compare the previous few years. The inflation

rate in year 2011 was increasing resulting from the changing of economic monetary

policy. The performance of Malaysian economy continues to growth in this year, but

obviously had a slowdown. In overall, growth in the advanced economies in 2011 was

expected to be slower than was forecasted at the beginning of the year.


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2.0 INTRODUCTION

Volatility interest rates or overnight interest rates in Malaysia handle by Bank Negara

Malaysia (BNM used for monetary policy direction. It is the target rates for the day-to-

day liquidity operation of the Bank Negara Malaysia (BNM). Overnight Policy Rate

(OPR) is the interest rate at which a depository institution lends immediately available

funds (balances within the central bank) to another depository institution overnight. This

is an efficient method for banks around the world to practice 'Accessing short-term

financing' from the central bank depositories. The interest rate of the OPR is influenced

by the central bank, where it is a good predictor for the movement of short-term interest

rates.

In Malaysia, changes in the OPR trigger a chain of events that affect Base Lending Rate

(BLR), short-term interest rates, fixed deposit rate, foreign exchange rates, long-term

interest rates, the amount of money and credit, and, ultimately, a range of economic

variables, including employment, output, and prices of goods and services which is the

micro and macro factors on the economic. The BLR is usually adjusted at the time in

correlation to the adjustments of the OPR which is determining by Bank Negara

Malaysia during Monetary Policy Meeting.


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Figure 1

Since most of the manufacturing sector is driven by the growth of exports, the industrial

production index reflects the poor export conditions of the global environment and has

been sinking, deepening towards the end of 2008. These results are not surprising in view

of Malaysia's heavy dependence on the environment and energy (E&E) sector and the

fact that Malaysia's major trading partners were badly affected by the global crisis.

The capital outflows from Malaysia increased with the onset of the crisis. There was a

surge of portfolio flows into the country in the first quarter of 2008, and starting in the

second quarter, the outflows continued to be extremely large. In order to preserve the

value of RM, Bank Negara Malaysia has taken action which prompted a drop in the value

of Malaysia's foreign reserves. This is relevance as we can learned from financial market

and institution that, increase the outflow of capital from Malaysia involve increase

selling of RM which can reduce the value of RM relative to foreign currency. So in

order to preserve RM, Bank Negara Malaysia should use their foreign reserve to buy the

RM.


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The impact of the crises has been felt most strongly in two sectors of the Malaysian

economy: the manufacturing sector (discussed above) and the construction sector. The

impact on the construction sector can be seen in several of its key indicators. The number

of new sales permits has been falling that reflected the pessimism of the industry in year

2008. The number of new sales permits had fell in year 2008. The number of housing

approvals has also been on the downtrend. The change in the production of construction-

related products shows the bleak outlook of the industry.

Furthermore, the more prominent sectors in the economy are already beginning to suffer

from the impact of the crisis. With the negative reactions that have been felt by the E&E

sector, construction industry, and property development, the outlook for local markets is

bleak. Not surprisingly, this bleak outlook has also had an impact on the financial sector.

Given the uncertainty in the economy and declining consumer confidence, the credit

market has been affected.

As a consequence of this weak confidence, loan approval has fallen. Particularly since

September 2008, the growth in loan approval has been negative and has continued to

decline. The caution exercised in the banking sector is indicated by the growth in loansdisbursed.

The overall atmosphere of negativity has also led to unemployment. Not surprisingly, the

manufacturing sector has suffered the most from the crisis in terms of retrenchments.

This can be seen in the second half of 2008. Not only the manufacturing sector had

suffered from the crisis, retrenchments were also high in the service and the only sector

that remains stable was the agriculture sector.


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Monetary policy in 2008 operated in a complex environment characterized by supplying

driven inflationary shocks, financial market contagion and decelerating global growth.

From the monetary policy perspective, the risks to growth and inflation in the first half of

the year were relatively balanced. The monetary policy challenge however intensified

significantly when inflation surged following the significant fuel price adjustment in June

with growth prospects being negatively affected by the ensuing deflationary effect on the

economy and by the global financial crisis. Given the magnitude of the increase in fuel

prices, the first round effects on the prices of goods and services were expected to be

large. While there were limitations to what monetary policy could do under these

circumstances, there was the concern that this might fuel inflationary expectations. Therewere negligible indications that wages were increasing disproportionately or evidence of

second-round effects on inflation.

The sharp increase in prices had, however, eroded the purchasing power of consumers,

leading to cutbacks in discretionary spending. There was also increasing indication that

the ongoing financial turmoil in the advanced economies had become more acute and had

begun to negatively affect global economic activity, posing downside risks to Malaysias

external sector. Global conditions deteriorated markedly and rapidly towards the end of

the year, with global growth prospects worsening beyond what was earlier anticipated.

Although domestic demand remained resilient, there were clear indications of slower

private sector activity. As inflation pressures abated, the policy focus turned to

containing the severity of the domestic economic slowdown. Monetary policy was

significantly adjusted to frontload the monetary stimulus to ensure that monetary

conditions remain accommodative and supportive of consumption and investment

activity.


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In conclusion, crisis that happened in year 2008 really has many significant effects on the

health of our country economy, financial stability, economy growth and so on. The

declines in FDI, foreign reserves, and portfolio funds, the current account balance

dropped significantly. From the above, we can say that the economy condition in year

2008 is in the combination of recession and high inflation as shown by the fact that

inflation was higher at 5.4% in 2008 figure 2 (next page) , due mainly to the sharp

increase in global food and fuel prices. Inflation peaked at 8.5% in July after retail fuel

prices were adjusted by 40.4% in June. With the nominal interest rate stable at the rate of

3.50, the real interest in year 2008 show a -3.86 in figure 3 (next page) as real interest

rate is the difference between the nominal interest and inflation. The higher the inflation

rate, the lower the expected return for the domestic assets such as property. Therefore the

demand for the domestic assets decline and the demand curve move to the left and cause

the price to fall. The fall in the price of the assets further deteriorate the balance sheet of

the banks. As a result, construction industry and financial sector suffered from the crisis

happed in year 2008. Given the uncertainty in the economy and declining consumer

confidence, the credit market has been affected also.

When there is recession, Bank Negara Malaysia has taken an appropriate action by

lowering the base lending rate in year 2008 as compared to year 2007 and further

lowering the rate in year 2009 as showed in figure 4 (next page). This is true because by

lowering the lending rate, it encourage people to borrow and spend (increase money

supply) which eventually increase the product demand and reduce unemployment.


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Figure 2

Figure 3

Figure 4


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3.2 ANALYSIS FOR YEAR 2009

In year 2009, with the heightened downside risks to growth, Bank Negara Malaysia had

reduced the Overnight Policy Rate (OPR) to 2.00% with immediate effect. With

reduction of OPR to 2.00%, daily weighted average overnight interbank rate decreased

and stabilized at the lower range of 1.99% to 2.01%. Interbank rates of other maturities

also declined in line with the reductions in the OPR. As the contraction happened in year

2008 had continued to year 2009 which prompt the government to take appropriate

actions (expansionary fiscal policy) to boost the economy such as monetary growth came

from strong Government spending, financed mainly by the subscription of Government

bonds by the banking institutions.

Figure 5

By the year of 2009, Malaysia's GDP Growth was reaching an historical high of 5.90

percent in September of 2009 and a record low of -7.60 percent in March of 2009. The

Government of Malaysia was continuing efforts to boost domestic demand to wean the

economy off of its dependence on exports as Malaysia's exports fell the most in 15 years

in Jan 2009. It is most likely due to lower demand for electrical and electronic products,

which account for one-third of Malaysia's total exports to key markets in China, Japan,

Europe and the United States.


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The collapse in global demand had tilted the nation into an economic contraction on the

year. Asia's export-dependent nations are reeling from the global slowdown, as Japan's

exports plunged 45.7% in January and Singapore exports fell 34.8%. Malaysia's exports

to the U.S. also dropped 31.8%. Shipments of electrical and electronics goods slid 33%

from a year earlier. Palm oil sales abroad fell 22% as prices eased from record highs

reached earlier last year. With the fall of exports, the domestic production was also

falling as shown in figure 1 that the GDP real growth rate has fallen as compared to year

2008. However, it became positive at the end of year 2009.

Figure 6

In addition, the inflation rate in Malaysia was reported at a high record of 3.9 percent in

January of 2009 and a low record of -2.40 percent in July of 2009. Malaysia's inflation

rate in February increased to 3.7% compared to the same period last year. When

compared to the previous month, it increased by 0.2%. Malaysias annual consumer price

inflation slowed more rapidly than expected in April to 3 percent. The fall in the pace of

inflation from 3.5 percent in March was in large part due to the fading of last years price

spike for petrol and food prices and economists expect that inflation will continue on a

downward path.


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Besides that, the relatively small depreciation of the ringgits nominal exchange rate

since early 2008 that is unlikely to result in higher imported prices and temporary loss of

productivity as the economy adjusts to the lower demand. However, the impact of this on

the inflation is expected to be more than offset by the strong economic forces behind the

moderation in economic activity as wage and input costs are reduced. Consequently,

inflation will remain low in 2009, especially in the second-half of the year.

The international economic and financial conditions had deteriorated in the early of year

2009. The major industrial economies were experiencing a recession and this had

significantly increased the risks to global growth. The contraction in global demand and

trade, combined with the reduction in global commodity prices, has affected the export

earnings of many of the regional economies, including Malaysia. These contraction

factors had been exacerbated by the protracted turmoil in the international financial

markets.

Furthermore, the sharper deterioration of the global economy had a significant impact on

the Malaysian economy. The large decline in external demand has led to a contraction in

exports and a moderation in the pace of private investment activity. In addition, these

developments had also affected labor market conditions. In an environment of

moderating growth and the significantly lower commodity prices, inflation had continued

to decelerate in year 2009. This deceleration has caused the weaker demand conditions

and lower imported inflation.


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In the year of 2009, the nominal rate had reached a maximum value of 12.87. As real

interest rate is the difference between the nominal interest and inflation. Financial

investors and lenders do best when the real interest rate is high since the real interest rate

measures the increase in their purchasing power. So, the lower the inflation rate, the

higher the expected return for the domestic assets such as property. The Bank Negara

Malaysia helped spur business spending on capital goods which also helped the

economys long-term performance. It also helped spur household expenditures on homes

or consumer durables like automobiles. Besides that, they had raised asset prices. When

the Bank Negara Malaysia increases the money supply, the public finds itself with more

money balances than it wants to hold. In response, people use these excess balances to

increase their purchases of goods and services and of assets like houses or corporate

equities.

Reflecting the high pass-through of the OPR reduction to the money market interest

rates, banks responded by lowering retail lending rates to households and businesses. The

benchmark lending rate, as measured by the average base lending rate (BLR) of

commercial banks, was reduced by 121 basis points, from 6.72% to 5.51%, by the end of

2009. This lowered the interest cost on variable rate loans pegged to the BLR, increasing

the disposable income of borrowers. There was some evidence that the low interest rate

environment had helped to stimulate demand for financing. In the household sector, the

competitive lending rates for property loans had spurred demand for loans to purchase or

refinance residential and non-residential properties. Demand for new financing from

businesses had also improved and the increase was observed across all major sectors,

namely finance, insurance and business services, manufacturing, wholesale and retail

trade as well as construction sectors and was mainly to finance working capital

requirements. The improvement in demand for new financing from both the business and

household sectors suggests that going forward financing activity is likely to increase, in

line with improvements in economic conditions.


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In the year 2010, interest rate adjusted upwards due to the increase in the Overnight

Policy Rate (OPR) by Bank Negara Malaysia. The upward adjustments of the OPR were

undertaken to reflect the improved economic outlook and to normalize monetary

conditions to prevent the phenomena of financial imbalances which will bring a bad

consequences to the growth of Malaysian economic.

Figure 7

Similarly, both the average base lending rate (BLR) and the average lending rate (ALR)

of commercial banks (CBs) were adjusted upwards in the year 2010. Despite the increase

in interest rate, the retail lending rates remained below their pre-crisis levels. As such, the

cost of financing to the economy remains low in the end of year 2010.

Along this year, monetary aggregates continued to grow at a sustained pace, which

means M1, or narrow money and M3, or broad money were continued to expand. The

increasing in M3 or broad money was mainly contributed by the private sector by thebanking system as well as higher holdings of private debt securities by the banks.

Besides that, M3, or broad money also expanded due to net foreign inflows and higher

government spending.


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Besides that, private sector financing in this year was remained robust. Financing for the

economy remained adequate and was accessible by all segments of the economy. This

condition was contributed by the sound banking system, well-functioning capital market,

the reasonable cost of borrowing and ample liquidity in the financial system.

2009

Annual Change (%)

2010

Annual Change (%)

Agriculture

Mining & quarrying

Manufacturing

Construction

Services

0.6

-6.3

-9.3

5.9

3.1

2.1

0.2

11.4

5.1

6.8

Real Gross Domestic

Product (GDP) -1.6 7.2

Table 1

Compare with 2009, most economic sectors, registered further growth in the year 2010.Growth in the manufacturing sector (from -9.3% to 11.4%) was higher with broad-based

expansion in this year, supported by the increasing of domestic and internal demand. The

mining and quarrying sector also improved, Gross Domestic Product (GDP) of mining

and quarrying sector increase from a negative level on 2009 become a positive level on

year 2010 (from -6.3% to 0.2%) because the increasing in crude oil production due to the

economy recovery in this year. Growth in the services sector was higher with broad-

based expansion in all sub-sectors (from 3.1% to 6.8%), supported by favorable domestic

demand conditions amid positive consumer sentiments. The agriculture sector continued

to expand (from 0.6% to 2.1%), but at a more moderate pace. Lastly, we can say that the

construction sector remained stable in the year 2010 which is only had a slightly declined

compare with 2009 (from 5.9% to 5.1%).


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Figure 8

In the year 2010, the inflation rate was increasing in response to the increase in the

Overnight Policy Rate (OPR) by Bank Negara Malaysia. Headline inflation, as measured

by the annual percentage change in the Consumer Price Index (CPI), averaged 1.7% in

2010 (2009: 0.6%). Core inflation, an indicator of the demand-driven pressures on prices,

rose at a more modest pace of 1.5% in 2010 (2009: 2.7%).

The increasing in inflation rate was more dominant by domestic supply factor. During

year 2010, there were a series of price adjustments as part of the subsidy rationalization

programmed announced. The example is upwards adjustments to the retail price of

RON95 petrol, diesel, LPG, sugar, RON97 petrol and kerosene. Besides that, prices for

premium cigarettes have also risen as a result of an increase in tax. In addition to changes

in administered prices, disruptions in supply due to the adverse weather conditions and

labour shortages also led to higher domestic price.


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As from the analysis for year 2010, we can say that the Malaysian economy experienced

a strong resumption of growth in 2010, driven by a robust expansion in private

consumption and a rebound in private investment due to the lower lending rate. Because

of the improvement in the domestic economy, the focus of monetary policy in year 2010

shifted away from the need to avert the economic downturn, and turned towards

balancing the risks to inflation and growth, and to prevent the build-up of financial

imbalances by ensuring that monetary conditions were appropriate.

In the year 2010, the economic indicators were signaling that the global recession was

receding. Global growth was being led by a rebound in manufacturing and an upturn in

the inventory cycle. The global growth underpinned by the improvement in retail sales,

consumer confidence, and the housing markets. In the domestic economy, positive

developments in manufacturing production, financing activity, external trade and labor

market conditions also show that the economic was recovered. The economy was

expected to expand further during the course of 2010, with growth being supported by

strengthening domestic demand, particularly private consumption, and further

improvements in external demand.

However, leaving the Overnight Policy Rate (OPR) at such a low level could give rise to

financial imbalances and create distorted incentives for economic agents, leading to the

mispricing of risks, financial disintermediation and excessive credit growth. A prolonged

period of low interest rates discouraged savings, led to excessive borrowing,

overinvestment in housing, and when combined with unchecked financial innovation, led

to large investments in risky financial products. First, monetary policy must be adjusted

pre-emotively to avoid the build-up of financial imbalances. Raising interest rates when

financial imbalances have already permeated into the economy would not be effective.

Second, the monetary policy stance needed to be recalibrated given that the threat of a

fundamental recession was no longer present. The extraordinary amount of monetary

stimulus provided in 2009 was no longer warranted as indicators showed growth

becoming more entrenched led by the strong growth of private sector demand.


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Notwithstanding this need to normalize interest rates, it was recognized that monetary

policy needed to remain accommodative to support the ongoing economic recovery.

So as the recovery of economy in Malaysia for 2010, the expansionary policy is no

longer necessary. As we can estimate that if the Bank Negara Malaysia continue their

expansionary policy, inflation will expected to increase which cause other problem to

incur. So the normalize action taken by the Bank Negara Malaysia is appropriate and on

time to stabilize the economy that is by gradually increase the interest rate.


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Figure 9

In 2011, the interest rate in Malaysia showed the increase as compare in year 2010. The

Bank Negara Malaysia (BNM) maintained the overnight policy rate (OPR) unchanged at

3.00 percent, and held the floor and ceiling rates of the corridor for the OPR at 2.75

percent and 3.25 percent respectively. However the Bank increased the Statutory Reserve

Requirement (SRR) ration by 100 basis points to 4.00 percent from 3.00 percent,

effective from 16 July 2011. This because as a measure to manage the significant build-

up of liquidity, which may result in financial imbalances and create risks to financial

stability.

According the BNM last increased the OPR by 25 basis points to 3.00 percent in May

last year; it also increased the SRR by 100bps to 3.00 percent. In Malaysia saw inflation

of 3.3 percent in May, up from 3.2 percent in April, and 3.0 percent March, bringing the

average to 2.8 percent for the first quarter of 2011. The Malaysia economy also

contracted -3.2 percent in the March quarter (+1.5 percent in Q4 2010), while growing

4.6 percent on an annual basis (4.8 percent in Q4 210), according to trading economics.


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Real GDP by Sector:

2010

Annual Change (%)

2011

Annual Change (%)

Agriculture

Mining & quarrying

Manufacturing

Construction

Services

2.1

0.2

11.4

5.1

6.8

5.6

-5.7

4.5

3.5

6.8

Real Gross Domestic

Product (GDP) 7.2 5.1

Table 2

Base on the data year 2011 from department of statistics, Malaysia Bank Negara

Malaysia we can see about the performance real GDP by sector. This here, our group will

focus analysis bases on the higher sector and lower sector for year 2011.

Services Sector (Higher)

The services sector, with a share of 59.4 per cent to total GDP, increased 6.4 per cent in

this quarter. Wholesale and retail trade sub-sector was the main contributor followed byfinance and insurance and communication sub-sectors.

In this quarter, the finance & insurance sub-sector improved to 6.4 per cent underpinned

by the robust performance in insurance activity. Growth momentum of communication

sub-sector advanced to 8.8 per cent backed by the higher usage of voice, data and

multimedia service. Similarly, transport & storage sub-sector continued to grow at 6.2

per cent propelled by freight and passenger transportation. In overall, the services sector

recorded strong growth of 6.8 per cent in 2011 (2010: 6.8%) amid firm domestic

demand. The sector remained the largest contributor to growth, accounting for 3.9

percentage points of overall GDP growth, as is evident in the case of developed

countries. As Malaysia moves towards becoming a developed nation, greater emphasis

should be targeted on the development of this services sector to serve as the engine of

growth to propel and sustain the economy.


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Mining and Quarrying (lower)

The mining and quarrying sector registered a milder setback of 3.3 per cent as compared

to the negative 6.1 per cent in preceding quarter attributed by the rebound of production

in natural gas to 1.6 per cent. Smaller decline was recorded in the production of crude oil

(-4.6 per cent), while the production of condensate remain subdued by registering a

negative 10.6 per cent. On an annual basis, the mining and quarrying sector declined to

5.7 per cent as compared to marginal growth of 0.2 per cent in 2010.In reflecting the

decline in the production of crude oil and condensates. This decline was caused by

maintenance purposes, declining production from mature fields and lower-than-expected

production from mature fields and declining production from mature fields and lower-

than-expected production from new fields. Despite higher demand from Japan following

the natural disaster in March, output of natural gas rose only marginally by 0.4 per cent,

as production was affected by the shutdown of gas processing facilities in Peninsular

Malaysia. Output in the mining sector contracted following a decline in the production of

crude oil and condensates.

In overall, the real gross domestic product (GDP) compares performance for the past

years of 7.2 per cent annual growth in 2010, the economy recorded an expansion of 5.1

per cent in 2011.

Lending Interest Rates (%) in Malaysia

Figure 9


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According to figure 9 (previous page), this showed about the lending rate and average

lending rate of commercial Banks in Malaysia performance. It seems that the base

lending rate BLR was quite raised in 2011 with an average of 6.53 percent as compared

to year 2010. But ALR dropped in year 2011 with an average of 5.05 percent if compare

the previous few years.

In banking institutions raised base lending rate (BLR) Within 8 days of the

announcement of the OPR increase, and the BLR was raised by 27 basis points to 6.54%

as at end-May. The increase in the BLR was 2 basis points over the OPR increase, after

imputing the higher cost of intermediation from the increase in the SRP. In the second

half of the year, however, global growth prospects began to deteriorate following the

adverse developments in the advanced economies. The European sovereign debt crisis

continued to intensify as the year progressed while policy uncertainties in the advanced

economies, particularly in the US and euro area, only served to heighten financial market

volatility and worsen confidence. Weakness in labour market in the advanced economies

also remained. In the US, the housing market continued to be weak and household

balance sheets remained impaired.

In overall, growth in the advanced economies in 2011 was expected to be slower than

was forecasted at the beginning of the year, with the exception of the euro area where the

core economies continued to experience strong growth. Growth in PR China was also

expected to moderate, due to the weaker external environment and the effects of earlier

tightening measures. Despite sustained domestic demand in the regional economies,

growth also moderated. This change in the global growth outlook was reflected in the

significant downward revisions to the 2011 and 2012 world growth forecasts by the IMF

between its June 2011 and September 2011 updates of the WEO. The world GDP growth

outlook was revised downward from 4.3% to 4.0% for 2011, and from 4.5% to 4.0% for

2012. These revisions indicated a renewed fragility of global economic growth and its

vulnerability to shocks.


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Spending and lending increase in 2011 as consumer confidence continues to improve. As

the Malaysian economy continued to recover from crisis of 2009, consumers became

more willing to spend money on big ticket items such as cars and housing in 2011. At the

same time, consumers became more confident about applying for loans, while lenders

proved increasingly willing to oblige. As a result, gross lending continued to grow

steadily in current value terms. Rising disposable incomes, lower unemployment rates

and a fall in the percentage of non-performing loans in the credit card, card lending and

mortgages/housing categories also had a positive impact on the development of the

Malaysian consumer lending market.

Inflation Rate for year 2011

Figure 10

According the domestic rate of inflation in Malaysia has continued to increase, rising to

3% in March to average 2.8% for the first quarter of 2011. The increase was mainly due

to higher food and fuel prices. The assessment is that supply factors will continue to be a

key determinant affecting consumer prices. Global commodity and energy prices are

projected to remain elevated during the year, with inflation in major trading partners also

expected to rise further. There are also some signs that domestic demand factors could

exert upward pressure on prices in the second half of the year.


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The global inflation, underpinned by higher food and energy prices. This upward trend

was reflected in core inflation, with country-specific factors playing a role. In the US, the

rise in core inflation reflected mainly the rising cost of rent and apparels. In the UK,

headline inflation was sustained above the BOEs target of 2% while the rise in core

inflation was due largely to the increase in VAT and to a certain extent, the depreciation

of the pound sterling. Nevertheless, underlying inflationary pressures in the advanced

economies remained subdued and longer-run inflation expectations were stable,

underscoring the low levels of resource utilization and weak domestic demand. Price

increases were more pronounced in the emerging economies, given the larger share of

commodity-related products in their consumption baskets.

In Asia, the weight age of food in the CPI basket ranges from 14% to 39%. Core inflation

also trended up in several regional economies, reflecting rising demand pressures on

account of favorable employment conditions and rising wages. Towards the latter part of

the year, the upward momentum of price increases slowed, and headline inflation rates

started to stabilize in both the advanced and the emerging economies, reflecting in part

the slower increases in commodity prices. Core inflation continued to increase in several

Asian economies as demand remained strong. In Thailand, core inflation rose through

November, reaching the upper limit of the central banks target range of 0.5%-3.0% as

domestic demand continued to expand amid fiscal stimulus by the newly-elected

government.


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4.0 RECOMMEDATION

No doubt, there are some signs of high inflation including property inflation rates.

Generally overall economy of the country is progressing in a positive way. Some critics

are forecasting some downward trends in the economy of Malaysia due to the slowdown

of global economic systems and credit crunch trigged by the US economy. Government

of Malaysia is tackling this issue in a meaningful ways. Malaysia is indulged in various

international and bilateral trade agreements with number of financially strong countries.

This financial act will cushion the Malaysian economy from bad impact caused by

current as well as future slow down economies.

International Property Brokers have good news for Malaysia property forecast and all

sorts of Malaysia real estate businesses associated with it. International Property Brokers

forecast that government of Malaysia will maintain budget deficit around 6.3 percent of

GDP within the period of 2009 to 2013. This huge budget deficit will help government to

maintain the subsidy in fuel and other important but basic house hold items. It is

expected that real GDP growth will remain around 3.8 percent.

Several reliable Malaysia economic calculators are indicating healthy sign of French

economy. This is the positive sign for the investors. Therefore it is completely safe forinvestors to invest their capitals in Malaysia. For property forecasting concern, Malaysia

real estate price inflation is high right now, but country will be able to curb this trend

with the help of enormous foreign capital coming into the country. The economist

international property forecast show various groundbreaking development projects are in

pipeline right now. These developments will correct the deficiencies cased by Malaysia

property inflation and overall global economic slowdown.


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So, with the sign of future increase inflation rate, the expected interest rate tends to be

high. This is because we have learned that interest rate move together with inflation rate.

The uncontrollable increase in inflation rate forces the Bank Negara Malaysia to undergo

contractionary policy by increasing interest rate to reduce the money supply. So whether

the future interest rate will increase or not is base on the intensity of inflation in

Malaysia.

Government has come out with many measurements to fight back the inflation that occur

our country. Some of them look done and some else dont make any reaction. For

example the increasing rate of bank interest giving hope to reduce loan from customer

but the behavior of some trader that hoarding the stock, worsens the situation. To face the

situation in more efficient way, government should make an adjustment on its policy to

face inflation. Government should start to encourage public to buy local good and also

makes good to buy.

Mean that, people should start to join in agriculture that can produce necessary good that

can be put in market. Making our own food can reduce the depended on import on food.

It reduces the money supply. Moreover, local goods are cheaper than imported product.

Local traders also need be more competitive. They cant simply increase the price to gain

more profit but they need to find new way to solve their problem. The Malaysia is not

done by the increase of oil price but the attitude of the traders itself. Self awareness is the

most important thing to be developed in our society today to prevent this act to be

inherited to next generation on that can make 1998 situation happens again.


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5.0 CONCLUSION

The volatility of interest rate in Malaysia is not so strong as compared to other country

such as United State. As we found that the interest rate in year 2008 is stick on 3.5% and

after that the interest rate decreased in year 2009 to become only 2% and follow by

2.75% in year 2010 and finally 2.75% in the first two quarter and 3.0% for the later

quarter in year 2011. All the changes have explained the underlying economy condition

and the monetary policy or others strategy that carried out by the bank Negara Malaysia.

In our analysis, we can see that there are several important financial tools are used by

Malaysia central bank (Bank Negara Malaysia) to control the overall economy in

Malaysia such as monetary policy and fiscal policy. In case of economic downgrade

situation, Government might try to use monetary policy such as interest rate to boost up

economy. By lowering interest rate, there is discouragement to save, but it will encourage

people to spend more and make investment which has higher return rate. For example,

businesses can access to cheaper funds to expand their business and produce more goods

and services.

Besides, it also helps to expand production and thus increase purchases of raw materials.

As for customers, they tempted to borrow more money to spend, such as buying cars and

houses. This will cause more money flowing in the system and improve GDP of the

country by increasing demand and supply for any product. Furthermore, by altering the

reserve required and increase discount loan to commercial bank, money supply will

increase and boost the economy. When people spend more the GDP can also be improve

because GDP is measured from Income and Expenditure of people in the country. So, the

main reason to reduce interest rate, reduce reserve required and increase discount loan is

to increase spending, eventually boost the economy from recession. As for the case for

fiscal policy, government will increase their spending during the time of recession. So,

monetary policy and fiscal policy is the policy that the government can used to stabilize

the economy.


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So far we had just mention the actions taken by the government during the time of

recession. For the time in which the expansion of the economy that cause the inflation

increase in the increasing rate, the actions taken by the government will be the vice versa

such as increase interest rate and reserve required, decrease discount loan to commercial

bank and finally reduce the government spending.

In conclusion, during the years of 2008 to 2011, the changes in the OPR trigger a chain

of events that affect Base Lending Rate (BLR), short-term interest rates, fixed deposit

rate, foreign exchange rates, long-term interest rates, the amount of money and credit,

and, ultimately, a range of economic variables, including employment, output, and prices

of goods and services which is the micro and macro factors on the economic. Thus, the

Malaysian central bank is expected to adjust the interest rates accordingly to ensure the

stability of economic growth.

volatility of interest rate malaysia 2008 - 2011

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