Malaysia's benchmark interest rate likely to stay

Source: Yeow Pooi Linf (The Star Online)

Economists say Bank Negara may take a wait-and-see stance

PETALING JAYA: Bank Negara is expected to keep the benchmark interest rate unchanged at 2% at its monetary policy meeting today, say economists contacted by StarBiz.

David Cohen, an economist with Action Economics in Singapore, said the central bank could afford to “wait-and-see” since inflationary pressures had eased while economic indicators of regional economies were showing improvement.

“Things have bottomed out regionally and I suspect that Malaysia will follow in the same trend,” he said in a telephone interview.

Cohen, nonetheless, cautioned that there were still a lot of uncertainties within the world economies and if Malaysia’s economic data continued to weaken, Bank Negara might have to reduce rates further.

RAM Holdings Bhd economist Dr Yeah Kim Leng concurred, adding that the central bank would “keep its fingers on the trigger but not pull it yet as the bullet will come in handy” if there were signs that the global or domestic economy were heading towards a “double-dip” recovery.

So far, the strong monetary, financial and fiscal policy responses rolled out simultaneously across the world have helped avert a global depression in the first-half year. China, for example, saw a gross domestic product growth of 7.9% in the second quarter, he said.

Malaysia’s contraction in output and export, like its regional export-oriented peers, had slowed down while consumer and investor confidence was on the upturn, as reflected by the recent stock market performance, he added.

Business investment in the real economy, meanwhile, might still be held back by lingering concerns over the possibility of a slip-up in the recovery process of the United States and European economies, Yeah said.

Forecast Pte Ltd economist Joanna Tan also believed that Bank Negara was likely to keep rates unchanged but added that the downtrend in inflation had increased the scope for monetary easing.

“Given previous rhetoric on frontloading of rates and the impact of fiscal stimulus in the second half of the year, Bank Negara is likely to keep rates unchanged while monitoring closely the growth-inflation situation,” she said.

Yeah said Bank Negara had much room to cut rates further if domestic demand were to deteriorate more than expected, given that inflation rate had slipped into negative territory in June (minus 1.4%) mainly due to higher base-effect.

Maybank Investment Bank economist Suhaimi Ilias, however, considered the present level of record low overnight policy rate sufficient since global and local economies were showing signs of bottoming and turning around.

The policy focus would be on availability rather than cost of credit, hence the measures like government guaranteed scheme for loans for working capital and industrial restructuring, as well as bonds like Danajamin and microcredit initiatives, he said.