The Effect Of Interest Rates On Malaysian Markets And Economy

1104 words - 4 pages

Changes in interest rates can have both positive and negative effects on the Malaysian markets. When the Bank Negara changes the rate at which banks borrow money, this has a ripple effect across the entire economy. Interest rates can have an effect on the economy as a whole, the stock and bond markets, inflation and recessions.1.How Interest can affect Malaysian consumer's spendingWith every loan, there is a possibility that the borrower will not repay the money. To compensate lenders for that risk, there must be a reward. Interest is the amount of money that lenders earn when they make a loan that the borrower repays, and the interest rate is the percentage of the loan amount that the lender charges to lend money.The existence of interest allows borrowers to spend money immediately, instead of waiting to save the money to make a purchase. The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars. When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the Malaysian economy. Businesses also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing. This creates a situation where output and productivity increase.Higher interest rates mean that Malaysian consumers don't have as much disposable income and must cut back on spending. When higher interest rates are coupled with increased lending standards, banks make fewer loans. This affects not only consumers, but also businesses, who cut back on spending for new equipment, thus slowing productivity or reducing the number of employees. The tighter lending standards and criteria mean that consumers will cut back on spending, and this will affect many businesses' bottom lines. This will cause the businesses to reduce the number of employees that they have and to hold off on any major equipment purchases.2.The Effect of Interest Rates on Inflation and RecessionsWhenever interest rates are rising or falling, there is a term used which called funds rate. This is the rate that banks in Malaysia use to lend each other money. It can change daily, and because this rate's movement affects all other loan rates, it is used as an indicator to show whether interest rates are rising or falling. These changes can affect both inflation and recessions. Inflation refers to the rise in the price of goods and services over time. It is the result of a strong and healthy economy. However, if inflation is left unchecked, it can lead to a significant loss of purchasing power.To help keep inflation manageable, the Bank Negara watches inflation indicators such as the Consumer Price Index (CPI) and the Producer Price Index (PPI). When these indicators start to raise more than 2-3% a year, there is a possibility to raise the funds rate to keep the rising prices under control. Because higher interest rates mean higher...

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