Interest rate cut set to release capital flows

Could the central bank’s decision to bring down ceiling deposit rates from March 13 – coming as it does on the back of rises in the prices of a number of essential products – fuel inflation pressures?

Several months ago the government weighed up pulling down interest rates. Now is the best time to realise the plan since bank liquidity has improved and inflation has started to come down. Besides, money supply pressures are often not a major factor early in the year.

Revising prices of essential goods when necessary is important in a market-based economy. The situation might even worsen if we insisted on reining in product prices. Besides, the price revisions were carefully considered with new price levels adding just 1 per cent to product prices.

When bank rates are driven down, more capital will be pumped into the market. The capital flow is within the central bank’s 15–17 per cent credit growth limits and the aim is to channel this into three priority areas: agriculture, small and medium size enterprises and export.

These areas all turn out products, provide jobs, stimulate purchasing power and propel economic development. They also help bring in money. I believe if capital is pumped [into these sectors in] an efficient manner, it can positively impact on inflation and national economic growth.

Are firms in a position to weather the storm with this modest 1 per cent point interest rate reduction?

This 1 per cent point reduction across the board of bank rates, particularly ceiling deposit rate and refinancing rate, will help firms more easily access lower-cost capital sources. The reduction is minor, but we need to be cautious in relaxing monetary policies to prioritise controlling inflation.

The government is set to bring inflation down to 9–10 per cent this year. If the interest rate slides 1 per cent point every quarter, the ceiling mobilising rate will be eased to 10–11 per cent by the year end. It is encouraging that the government’s commitment to fighting against inflation and lowering rates has started to work as this helps elevate confidence in the community and among businesses.

How will the move affect small banks?

The real health of banks will be apparent after the move. That is an important step as it helps reveal banks’ real capacity. From here, the State Bank will provide closer guidance, particularly for weaker banks, to ensure effective banking system performance.

The interest rate has begun to ease. Are we likely to see lower ceiling rates by the end of the year?

It is still impossible to abrogate ceiling interest rates in the near term though both mobilising and lending ceiling rates must be removed sooner or later. [The ceiling] mobilising rate should be phased out first, then [the ceiling] lending rate. We can consider lifting ceiling rates if new favourable factors emerge in the third or fourth quarter.