Carmelo Ferlito, a senior fellow at the Institute for Democracy and Economic Affairs (IDEAS), said artificial lowering of the interest rate would also result in further support for the growth of a market “which probably reached its saturation a few years ago and therefore now has to experience a readjustment crisis”.
In a statement today, he said with the recent increase of overnight policy rate (OPR) by Bank Negara Malaysia (BNM), two different messages were being given related to the same signal, the interest rate.
“The interest rate is a peculiar price communicating the present or future orientation of economic actors. Prices are signals and as such summarise the terms of exchange on the market.
“In a way, the price system helps millions of people in mutually coordinating their plans without the need for any central coordinating authority or any coercion.
“The world economy experiences the strange situation where, even in those countries where the central role of prices emerging from the free market forces interplay is understood, one of the key signals for the economic system, the interest rate, is centrally fixed by a monetary authority. Such a system easily drives market participants toward wrong choices,” he said.
Ferlito said the best solution to mitigate speculative waves of investments and malinvestments, like the one experienced by the Malaysian property market over the past few years, would be to abolish the political power and central bank authority over the interest rate.
Instead, he said, the interest rate should be free to emerge from the interaction of market forces and as the result of an information exchange process between market participants.
Ferlito said only in this way would investment decisions be based on a signal consistent with the intertemporal preferences of market participants.
During a recent high-level committee meeting on housing, Deputy Prime Minister Ahmad Zahid Hamidi said Putrajaya would submit a proposal to BNM for a lower mortgage interest rate, in a bid to reduce the overall financial burden of Malaysian homeowners.
He said the proposal would be a part of the National Housing Policy 2.0, which would also include a review of the freeze on property development projects worth RM1 million and above that came into effect last November.
“If possible, the housing loan interest rate should be low enough that it is very competitive but at the same time does not impact the national economy negatively,” he said.
His announcement was made on the same day that BNM raised the OPR by 25 basis points to 3.25% during its Monetary Policy Committee meeting. This was the first increase since July 2014.
Rehda welcomes move to reduce interest rates for housing loans