Kuala Lumpur, 29 January 2018 – National Housing Department has proposed reducing the current housing loan interest rate. Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi argued that a competitive interest rate is needed to allow people afford in securing housing loan. The proposal came out on the same day (Thursday) with Bank Negara Malaysia (BNM) raised the Overnight Policy Rate (OPR) by 25 basis points during its Monetary Policy Committee (MPC) to 3.25% – the first increase since July 2014.

Commenting on the issues, IDEAS Senior Fellow Dr Carmelo Ferlito said “If Datuk Seri Dr Ahmad Zahid Hamidi’s proposal is accepted, it will hide the fact that something wrong happened on the property market. Artificial lowering of the interest rate will hide the fact that a speculative wave and a supportive credit policy took place, and will result in further supporting the growth of a market which probably reached its saturation a few years ago and therefore now has to experience a readjustment crisis.”

With the increase of OPR by BNM, Dr Carmelo believed that we are experiencing two different messages related to the same signal, the interest rate. He says “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,” described Dr Carmelo.

“The best solution in order to mitigate speculative waves of investments and malinvestments, like the one experienced by the Malaysia property market over the past few years, would be to abolish the political power and the central bank authority over the interest rate, leaving it free to emerge from the interaction of market forces and as the result of an information exchange process between market participants. Only in this way, investment decisions would be based on a signal consistent with the intertemporal preferences of market participants,” concluded Dr Carmelo.