The current interest rate in Malaysia is 3.25 percent and the inflation rate is at 3.5 percent, if Bank Negara Malaysia or Central Bank of Malaysia reduced the interest rate the inflation rate would increase in Malaysia. In an economy when there is too much money the inflation rate increases, reduction in interest rate will discourage from depositing and it will encourage in borrowing. The low interest rate reduces the cost of borrowing due to this most of the people will finance their cars, houses, businesses and investments by borrowing money from the bank. The interest rate is relatively low in current economy of US and Europe, but the central bank put restriction on Banks in lending money, that is why the inflation rate is low even that the interest rate is low. The central bank of US and other developed countries control the banks through Macroprudential policy.
Why would inflation rate increase if Bank Negara Malaysia reduced interest rate?
The inflation rate will increase if Bank Negara Malaysia reduced interest rate because they would be too much money in the economy of Malaysia. For many years Malaysian government has been battling with high inflation rate that is why they have been giving subsidiary in petrol, utility and other things. If the central bank of Malaysia reduces the interest rate then there will be an increase in inflation rate, but if the central bank of Malaysia also introduces Macroprudential policy then they will be slowing down of output. The restriction on banks to give loans to consumers and businesses will reduce the output because most of the people finance their houses and cars through bank loans. The current interest rate of Malaysia is in optimal point and it takes time to reduce inflation rate.