Could cutting interest rates save our economy?

Interest Rate Definition

The 2019 Coronavirus outbreak, which forced countries to go into lockdown and practice social distancing, has hit economies hard and the Malaysian economy has been unable to withstand it either. Bank Negara Malaysia has started cutting interest rates, up to four times this year and the overnight policy rate down to 1.75 percent, the lowest level since it was implemented as a policy tool in 2004. This level is also lower than the overnight policy rate of 2% during the 2009 international financial crisis.

The authorities hope that this ultra-low loan costs will revive the Malaysian economy. That’s because it will help ease the burden on loaners and reduce debt-relief cases, thereby mitigating the negative impact on the economy. This, if done right, will help to promote economic recovery if the outbreak is under control.

At the same time, low loaning costs will encourage other loaners to borrow aggressively, thereby stimulating economic activity. However, the positive effects will be delayed, as confidence in borrowing will only be restored when the economy is more stable.

Enterprises transition towards digitalization.

However, I believe that businesses that have weathered the crisis will seize the opportunity to invest and expand their businesses, especially those that are transforming their businesses into digital at a time of weak market demand and generally low operating costs.

On the other hand, the low interest rate environment created by the Bank of Negara has its drawbacks, such as the money that people borrow from taking advantage of the low interest rates may not be used to do business and stimulate economic activity, but may push up asset prices as a result of inflows into real estate and the stock market.

At present, as the domestic industrial market is not stable, it is expected that it will take some time to see if people have regained confidence, buy assets and push up asset prices. In any case, I think that the government’s resumption of the HOUSING Scheme (HOC) and the exemption of industrial profits tax will help the industrial market.

Increasing stock market risk.

At the same time, there are signs that low interest rates have improved the Malaysian stock market, as evidenced by the continued sell-off of bursa stocks by foreign investors, but by the surge in local retail investors. There have been stories that revealed that someone had asked his father why he offered his bank term deposit, and the answer was to transfer the money to the stock market. Shocking.

As more and more retail investors offer to invest in the stock market, they are exposed to higher risks. The higher the so-called potential risk, the higher the potential return, the lower the potential risk, and the lower the potential return.

The interest earned on keeping money in the bank is low, but the risk of losing the deposit is low. Investing in the stock market is the opposite, since the stock itself is a riskier investment vehicle, the chances of a return are naturally high.

Relying on interest on deposits.

Indeed, another drawback of low interest rates is the low return on deposits held in banks. This group will bear the brunt, especially those who rely on bank savings to cope with the cost of living. As a result, the Government has decided to sell Muslim bonds to help them get a higher return, but the amount of the bond is small.

Low bank interest rates have also caused many people in the past few years to invest their hard-earned money towards the “money game”, hoping to make quick money from it. However, many people have no return on such “investments”.

I hope you have learned from it, after all, there is no easy way to make money in this world.

Leave a Reply

Your email address will not be published. Required fields are marked *