Question: Volatility of Interest Rate Malaysia 2008 - 2011

Contents
Acknowledgment 1.0 Executive summary 2.0 Introduction 3.0 Analysis 4.0 Recommendation 2 3-4 5-6 7-27 28-29

5.0 Conclusion

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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.

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.

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-today 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.

2.1 INTEREST RATES TERM STRUCTURE DEFINITION

The interest rates term structure is the relation between the interest rates and the time to maturity of the debt for a given borrower in a given currency. For example, the current U.S. dollar interest rates paid on U.S. Treasury securities for various maturities are closely watched by many traders, and are commonly plotted on a graph such as the one on the right which is informally called the yield curve. More formal mathematical description of this relation is often called the term structure of interest rates. Yield curve are usually upward sloping asymptotically, the longer the maturity, the higher the yield, with diminishing marginal growth. There are two common explanations for this phenomenon. First, it may be that the market is anticipating a rise in the risk-free rate. If investor holds off investing now, they may receive better rates in the future. Therefore, under the arbitrage pricing theory, investors who are willing to lock their money in no need to be compensated for the anticipated rise in rates-- thus the higher interest rates on long-term investment. However, interest rates call fall just as they can rise. The longer maturities entail greater entail greater risks for the investor (for example: the lender). Risk premium should be paid, since with longer maturities, more catastrophic events might occur that impact the investment. Although depends on the notion that the economy faces more uncertainties in the distant future that in the near term, and the risk of future adverse event (such as default and higher short-term interest rates). This effect is referred to as the liquidity spread. If the market expects more volatility in the future, even if interest rates are anticipated to decline, the increase in the risk premium can influence the spread and cause in increasing yield.

3.0 ANALYSIS

3.1 ANALYSIS FOR YEAR 2008 In 2008, Malaysia has suffered the subprime crisis began in August 2007 in the USA. The housing burst in the US has led to a sequence of economic consequences in the US, and then it has got transmitted to other economies, be it to developed and emerging economies. This crisis has developed into the largest financial shock, affecting heavy damage on markets and institutions at the core of the global financial system. Being a small open and export-dependent economy, Malaysia has not been separated from this external shock. The negative shock was transmitted to the Malaysian economy in the fourth quarter of 2008. Exports and industrial outputs deteriorated, outflow of portfolio investments increased, and investments declined. Two economic indicators that show the impact of the current crisis are exports and the industrial production index. Export and import took a downturn towards the end of the year. It is understandable that imports should fall along with exports because imports of intermediate goods are required to meet the production of exports. The strong demand for exports that comes from Malaysia's major trading partners (US, Japan, and the EU) having fallen, it should be expected that exports from Malaysia would also fall. With the fall of exports, the domestic production was also falling as shown in figure 1 (next page) that the GDP real growth rate has falling as compared to year 2007 and further fall to become negative in year 2009.

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.

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 constructionrelated 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 loans disbursed. 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.

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. There were 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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3.3 ANALYSIS FOR YEAR 2010

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 the banking 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 (%) Agriculture Mining & quarrying Manufacturing Construction Services Real Gross Domestic Product (GDP) -1.6 0.6 -6.3 -9.3 5.9 3.1

2010 Annual Change (%) 2.1 0.2 11.4 5.1 6.8

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 broadbased 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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3.4 ANALYSIS FOR YEAR 2011

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 buildup 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 (%) Agriculture Mining & quarrying Manufacturing Construction Services Real Gross Domestic Product (GDP) 7.2 Table 2 5.1 2.1 0.2 11.4 5.1 6.8 2011 Annual Change (%) 5.6 -5.7 4.5 3.5 6.8

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 by finance 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 lowerthan-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 for investors 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.

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