Zeti: Interest rates need normalisation

KUALA LUMPUR: Some “normalisation” of the interest rates are now in order after they were reduced to “unprecedented” levels following the global financial crisis, said Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz.

She said on Friday, Jan 29 that the interest rates were reduced to the current 2% to avoid a fundamental recession as the global crisis had led to an emergency condition.

“Therefore, (we) need to look forward to some normalisation of interest rates at some point,” she told reporters after a public lecture by the first holder of the International Centre for Education in Islamic Finance (INCEIF) Chair, Dr Abbas Mirakhor.

She said that the normalisation should not be looked at as a tightening, because the policy can still support growth “especially in an environment where inflation is going to remain modest”.

Asked on the danger of keeping the interest rates too low for too long, Zeti said that although there were no signs of asset bubble risk, it could lead to other financial imbalance, such as consumer moving their funds outside the country in order to enhance the return on their savings.

“It would result in them (the consumers) taking higher risk without them realising and cause problems later on,” she said, adding that if these problems were to happen, the central bank would have to implement more drastic measures, and to avoid that “we should look at some point to normalized the rates”.

Zeti said that the country was not seeing excessive leverage on home loans nor seeing the formation of an asset bubble as “borrowing by households still remains within prudential levels”. She said that Malaysia offers a wide range of advisory services so consumers had been “prudent in managing their debt and are living within their means”.

On a separate matter, Zeti said Malaysia’s plan to issue foreign banking licences would be revealed in the second half on this year as Bank Negara was currently in the process of evaluating the applications that had been sent before the Dec 31 deadline.