BLR is fixed at a ceiling level by BNM, currently 6.75%, yes correct. But the fixed rate can be changed from time to time by BNM depended on economy situation. Just for the last 2-3 years, economy is not moving in either direction, so the BLR is being left at 6.75% for this period of time but it doesn't mean future BLR will be the same especially current economy condition and inflation situation will have big impact on the macro-economy side.

So BLR is not fixed but fixed at a ceiling by BNM and can be reviewed from time to time, normally when BNM hold meeting, (about a month plus for every meeting interval), only when there is emergency situation, then BNM will act accordingly which is same across various countries central bank or Fed Reserves.

I hope my explainatin is clear enough.

This post has been edited by cherroy: Jun 10 2008, 09:36 PM

The high supply of money has caused FD rate stay at historical low. Why? because since 1998 crisis, domestic demand has slumped and not recover well, while export is good because of cheaper RM, so trade surplus is building every year, every month, so money become plenty.
But with less investment opportunites around (businesses expansion, investment like stock market), those cash is just sitting in the banks doing not many things. You can esee those well managed company, mostly are high in cash level, which also a lot of well managed listed company give windfall special dividend from time to time because those cash has not much opportunites being used.

Gov spending is not reduced, don't be misled by this few days newspapers headline, those reduction is just tiny portion to make newspaper headlines, insignificant.
In fact, if gov spending is really reduced and slightly thrifty (like don't buy a Rm200 screw drive set) then gov won't have budget deficit of more than 3% of total GDP.

Also, although Malaysia ecoonomy is highly depended on gov (as 1 millions + workforce is in gov servant), still gov spending is not the entire picture, private sector is the one main driving force of the economy.

Another point is that reduction in gov spending has no direct relationship with money supply.

Actually we have negative interest rate at the moment as inflation rate > FD interest rate.

This post has been edited by cherroy: Jun 11 2008, 11:34 AM

No as overnight rate for RM is 3.xx%, it won't be a target for carry trade. But Yen is, as Yen rate is 0.25-0.5% only so take Yen to invest in AUD or NZD will yield them 6-7%.

Also RM cannot be traded in overseas since 1998 currency control which not yet fully liberalised or open for trade, it won't be a target for carry trade as well.

USD is better carry trade target besides Yen. But with possibility of rate hike from Fed Reserves, it prompt those carry trade hedge fund manager to think twice.

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Added on June 12, 2008, 1:34 pmDreamer is right, Malaysia financial market is not lacking of cash, but the main problem is those cash has nowhere to go.

This post has been edited by cherroy: Jun 12 2008, 01:34 PM

Cutting interest rate which eventually causing FD rate goes down, will discourage people to save in the particular currency. So people will sell the currency and opt to those offer high yield one, like currently AUD and NZD.

Cutting interst rate will encourage spending becuase loan become cheaper, quite correct. But with potential depreciation of the currency as mentioned earlier, it will prompt inflation to shoot up.
So cutting interet rate will lead to higher CPI number.

Having said that, cutting interest rate sometimes has 2 way of effect depended on particular country culture of spending. Like Japan and Asian countries, the more you cut down the interest rate, the harder people save because the poor economy outlook. Asian people tend to save more when economy situation and future looks bleak.
But for western countries, it is the other way round.

Comsumers staples has less degree of effect in whatever economy condition because those are daily essential item which people find no way to cut down like rice, oil etc. I don't mean has no effect, just degree of effect is lessen compared to those consumer discreationally item like cars etc. Even economy booming time, consumers staples rise in business also not as significant than others.

This point is not exactly right. When central bank cutting rate mean they want to spur the economy and flooding the market with more money to push start the economy.

So cutting rate will push up the inflation not prevent it. Just there are some potential ouotflow of money causing the particular currency to depreciate in currency market. But it doesn't mean surely, as seen by Yen, even with no interest people still buying Yen because of tremendous trade surplus.

Not possible unless Malaysia is having another crisis like 1997. Mostly rate hike won't exceed 0.5-1.0% range only.

oumind has the point.

Why? Because several factors

1. BNM doesn't want RM to appreciate (increase in interest rate can push upa particular currency because of yield) which can jeopradise the export industry (Malaysia is a highly export orientation economy)
2. High interest rate will kill of a lot of domestic demand, eventually increase the NPL of banks which might drag the banks into some problems.
3. Gov prefer to see inflation (provided it doesn't go out of control) rather than people losing their home and jobs which eventually might cause them political and social problem.

Unless economy is growing at red hot pace currently or previously (like China) then BNM has the room to raise up to 10% range which is not the case of current situation. BNM is not very famous for fighting inflation situation either. They are more prefer growth rather controlling or anchoring the inflation or inflation expectation, just my personal opinion.

The amount of foreign currency reserves come from trade surplus and money inflow.

Malaysia or country doesn't buy USD for their foreign reserves aka you don't print money purposely to buy other currency in open market to put in reserves. Generally, foreign Reserves come from trade surplus.

Eg.
Malaysia is an export orientated country. So locally produced goods, palm oil, oil etc, are exported to all over the world. So company in Malaysia will receive money in the form of USD, so there are foreign currency inflow to Malaysia. So if company wish to convert to RM, then circulation printed money of BNM will be converted to USD. Then BNM will keep those USD, that's where foreign currency reserves come from. You don't purposely print money to buy USD in the open market, it will cause massive depreciation of your currency. Every central banks are very careful about printing money or provide money supply, as it has significant impact on your currency value. Generally they only print or provide money supply according to the economy needs as mentioned earlier, RM being printed because of demand for RM from USD. Yes, it will flood the financial system with more liqudity, as mentioned in your post or linked, but this come from demand for money in the first place.

Eg. businessman that received money from export businesses then take those USD to BNM to convert to RM, how can BNM say no? So, BNM needs to give the businessman RM and keep those USD. So eventually there become more RM in the financial market, that's why KLIBOR rate stay at relative low level (low FD rate), because the financial is full of money around.

Whenever you see country with high trade surplus, then they definitely have huge foreign reserves currency. Japan, China, HK all are having huge trade surplus with US.

Malaysia has low foreign currency reserves prior before 1997 crisis because at that time, Malaysia economy is in red hot form, growing robustly, so local demand is strong, and demand for import goods, machinery is high, so there was trade deficit at that time. But since 1997 crisis, domestic economy no longer as same as previously, so demand of import shrink but export due to cheaper RM (after depreciation) continue to grow, so the trade surplus become bigger and bigger so does foreign currency reserves.

Also, another point to make, current inflation situation is not mainly demand driven by domestic Malaysia demand. Domestic demand is not as strong as people taught. It is mostly demand driven by external factors, although Malaysia economy is 'full of money' also, but this is not the major current massive inflationary factor.
Main culprit current inflation situation is from China demand especially on commodities side. Also Fed whom provide cheap money around the world, which lead to US subprime meltdown as well.

Just my opinion.

This post has been edited by cherroy: Jun 21 2008, 10:43 PM

Yes & Yes.

But FD rate has not much room for the downside, especially one year is fixed at 3.7% which BNM required banks to do so as previous they stated, unless they change the policy again.

If BLR does go up in the future that's mean economy situation is good or economy is growing at a rapid rate, which means people have more disposal income, and more job being created, by then properties up will go up which properties owner might gain through the price appreciation, still think or worry about of sustainability of the repayment by the owner?

Greedy greedy banks again, isn't it the BLR should be slahsed to 5.45%, instead of 5.55%?

BNM lower OPR rate by 0.5%, cut SRR to 1% (banks cost become cheaper), while all of them slashed FD rate 0.5%, but BLR just cut 0.4%. Try to squeeze out more profit out of it from the BNM's move?

Not that serious lar. Just feel not right.

BNM lower down interest rate which primary intention is to cheapen the borrowing cost and spur economy acitvities, but if banks don't want to lower the same degree of reluctant to lower (but they instantly lower the FD rate), then it makes no different for BNM to lower the rate. All interest cut benefit are being channelled into more profit for the banks only, while those FD depositors and pensioner getting little interest out of it, but banks still charge the same loan of interest on loan given. The margin of profit (BLR-Fd rate) is widen.

Bank always being well known of lend you umbrella when sunshine while taking back the umbrella when raining.

This is what indeed happens in worldwide now especially in US and Europe. Fed or any central banks lower down to zero also has not effect, because bankers are reluctantly to lend after Lehman went under.
That's what happened during September to Nov 2008 which this damage has sent worldwide into recession.

This post has been edited by cherroy: Feb 26 2009, 11:28 PM

It should be back to 3% prior before the financial crisis.