KUCHING: Malaysia’s latest interest rate cut may offer short-term support, but overreliance on monetary policy could backfire, said economist Dr Carmelo Ferlito.
The Center for Market Education chief executive said the belief that adjusting interest rates alone can steer the economy is misguided.
“The economy consists of billions of individual decisions shaped by interpretations of signals. Nothing is automatic, and every policy action carries open-ended outcomes,” he said, commenting on Bank Negara Malaysia’s decision to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.75 per cent.
Ferlito cautioned against placing too much faith in rate adjustments, noting that even among economists, confidence in the stimulus effect of rate cuts is fading.
“Some believe such measures contribute to boom-and-bust cycles. If monetary policy worked precisely as textbook theory suggests cutting rates to stimulate growth and raising them to cool inflation, crises wouldn’t happen,” he said.
He stressed that central bank decisions are made using past data, but their effects take time to materialise often in a context that has already changed.
“Interest rate changes should be treated as signals rather than outcomes. When a central bank cuts rates, it signals that borrowing is cheaper or that more funds are available for investment,” he explained.
But how those signals are interpreted matters.
Citing economists Friedrich Hayek, Ludwig Lachmann and Don Lavoie, Ferlito said: “Prices may be objective, but decisions are based on subjective interpretation. One might see lower rates as an opportunity to invest, while another might view it as a warning of economic trouble.”
He added that investment is not purely driven by borrowing costs, but by future profit expectations.
“If entrepreneurs don’t foresee a bright outlook, they won’t invest no matter how low interest rates go.”
He also pointed to mixed results from Europe’s quantitative easing efforts as a cautionary tale, urging Malaysia not to rely solely on monetary tools.
“What matters more is clarity in political and economic direction. A stable institutional environment gives investors the confidence to act,” Ferlito said.
“Monetary easing may help, but political stability and a clear policy agenda would go further in encouraging real investment.”
