KUALA LUMPUR: Bank Negara’s move to potentially raise interest rates in the near future should be viewed as a “normalisation” process, rather than an act of “tightening” monetary policy, said governor Tan Sri Dr Zeti Akhtar Aziz.

She emphasised the need for the markets to make a distinction between normalisation and tightening, pointing out that the significant reductions in interest rates implemented by the central bank last year were just an emergency position that the country had to take to avoid a fundamental recession.

“We need to look towards the normalisation of interest rates at some point. It should not be seen as tightening,” Zeti told reporters yesterday after a public lecture by Dr Abbas Mirakhor, the first holder of the International Centre for Education in Islamic Finance Chair.

Zeti voiced her concern that if interest rates were kept too low for too long, people would turn away from the conventional banking system in search of other instruments to enhance their returns on savings, and that could possibly involve them taking excessive risks without realising it.

“That could create a problem later on.

“We don’t want to wait for something to happen and then only take action,” she added, while pointing out that there was no sign of asset bubble forming or excessive leverage by consumers in the country yet.

“Borrowings of households are still at prudent levels,” she said.

On Tuesday, Bank Negara kept its overnight policy rate unchanged at a record low of 2%, but indicated that it could not keep the rate too low for a prolonged period as the local economy strengthened, otherwise, there would be a build-up of financial imbalances in the system.

The markets took that statement as a hint that the central bank would raise interest rates sooner than expected.

According to Zeti, the central bank could not tell when it would raise interest rates and by how much, but she said the monetary policy committee would continue to assess the prevailing economic trends to decide on the right quantum and timing to do so.

The next meeting of the monetary policy committee at Bank Negara is scheduled for early March.

“Anyhow, our stance is still to remain accommodative to support growth, especially in an environment where inflation is going to remain modest,” Zeti said.

The Government has targeted to hit a 5% gross domestic product growth this year, although the official forecast is for between 2% and 3% growth this year.

Very often there are people asking what is the Base Lending Rate (BLR)?

Base Lending Rate (BLR) is a minimum interest rate calculated by financial institutions based on a formula which takes into account the institutions cost of funds and other administrative costs. The BLR is almost always the same amongst major banks. Adjustments to the BLR are made by banks at the almost same time; although, the BLR does not adjust on any regular basis. The BLR is usually adjusted at the time in correlation to the adjustments of the Overnight Policy Rate (OPR) which is determine by Bank Negara Malaysia (BNM) during Monetary Policy Meeting . Banks in some countries use the name “Prime Rate” or “Prime Lending Rate” to refer to their Base Lending Rate. On 1 November 1995, Bank Negara Malaysia (”BNM”) imposed a ceiling on the BLRs quoted by banking institutions. The ceiling rate would be determined by a formula. This framework was further revised on 1 September 1998 to enhance the speed of transmission of changes in BNM’s monetary policy (via revisions to intervention rate and Statutory Reserve Requirement to changes in the economy’s interest rate levels.

In general, the formula for the ceiling BLR is calculated as follows:

Ceiling BLR = Adjusted BNM Intervention Rate + Fixed administrative charge

The ceiling BLRs for commercial banks and finance companies are fundamentally different due to the way the Adjusted BNM Intervention Rate is interpreted:

• For commercial banks, the Adjusted BNM Intervention Rate = BNM Intervention Rate x 80% / (1-SRR%)

• For finance companies, the Adjusted BNM Intervention Rate = BNM Intervention Rate / (1-SRR%)

Commercial banks have a lower Adjusted BNM Intervention Rate (compared to finance companies) resulting in lower ceiling BLR as commercial banks have a relatively lower cost of funds. This is due to the presence of zero-interest current account balances.

In practice, the BNM Intervention Rate is taken as the prevailing BNM 3-month intervention rate (the previous month’s average KLIBOR was formerly used). BNM set the fixed administrative charge at 2.50% initially, but on 1 September 2008 lowered it to 2.25% in order to promote greater operational efficiency among banking institutions. Whenever BNM changes the intervention rate or the Statutory Reserve Requirement, banking institutions are given 1 week to adjust their BLR to comply with the new ceiling.