Malaysia likely to maintain key rate

The monetary policy will have to be pro-growth until the global economic outlook brightens up again, says DBS Bank

Read more: Malaysia likely to maintain key rate http://www.btimes.com.my/articles/opr06-2/Article/#ixzz1XEdkAYf3

Kuala Lumpur: Bank Negara Malaysia (BNM) is expected to keep the main interest rate steady at 3.0 per cent amid rising concerns the global economy could slip into recession again. "The monetary policy will have to be pro-growth until the global economic outlook brightens up again," remarked Irvin Seah of DBS Bank in Singapore. The central bank's monetary policy committee meets tomorrow and economists think BNM will adopt a cautious tone in its statement. As such, expectations are that it will leave the Overnight Policy Rate (OPR), the benchmark key interest rate, unchanged as well as the statutory reserve requirement (SRR) at 4 per cent. They also think that BNM would keep rates steady for now since it had hiked the OPR earlier than many other regional central banks. This gives it room to pause and assess the situation before deciding its next course of action. Kit Wei Zheng of Citi thinks BNM could also tolerate a temporary period of negative real interest rates to help spur consumer and private sector spending and offset weak exports. Negative rates happen when the inflation rate is higher than the interest rate. He said BNM governor Tan Sri Dr Zeti Akhtar Aziz had also said there were tools other than the OPR to tackle inflation. This suggests a preference for administrative measures rather than interest rate hikes. "However, with headline inflation still elevated and growth subdued but not disastrous, it may be premature to expect rate cuts at this stage." Standard Chartered Bank's Edward Lee cautioned that Malaysia's second quarter growth at 4 per cent was still the weakest year-on-year figure since the third quarter of 2009. "More importantly, growing downside risks to external growth result in a murkier outlook for the second half. Malaysia's economy remains highly correlated to the US and EU (European Union), and any weakness on that front will weigh on growth." BNM, he said, now has even more justification to maintain its wait-and-see stance given the negative impact on global sentiment from recent developments in the US and EU.