Question

In: Economics

Why does need any regulation if there is interest rate changes and how do Malaysian react...

Why does need any regulation if there is interest rate changes and how do Malaysian react to the changes of interest rates? What is the consequences of the changes of interest rates and how interest rates relates to stocks and bonds markets?

Solutions

Expert Solution

Malaysia has been facing a slowdown in growth especially arising from the US-China trade tensions which are having propagating effects on the rest of the world. An interest rate cute decided by the central bank will lead to boost in the money supply in the economy which will lead to increase in production and thereby also increasing the employment situation of the country. This dovish stance is necessary which will have an impact on the Gross Domestic Product situation.

For the first time since July 2016, Bank Negara Malaysia, the Central Bank of Malaysia, reduced the interest rate from by 25 basis points to 3 percent. There was an increase in the rate to 3.25 percent in January 2018. The recent move in the decision of reduction arises from the fact of increased global risks to the economy. Investors are looking towards other countries and stocks had recorded outflows. Bonds too may be on the cusp of another sell-off.

The monetary policy which can revive exports may stem from the situation where central banks are looking at reduction in rates to boost their economies. Growth in 2018 for the entire year came down to 4.7 percent from 5.9 percent the previous year in Malaysia. The country's stock market has been one of the worst performing in the world this year. The rate cut may improve the performance of stocks, with companies having the possibility of improving their performance. The reduction is also said to support the bond market as the currency markets will need to price in the bond outflow which could be a buying opportunity.


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