Monetary policy moves if prices rise further

Inflation is likely to have hit 6% to 7% in June, says Zeti

BASEL: Malaysia's inflation is likely to have hit 6% to 7% in June and Bank Negara will take action on monetary policy in the event of generalised price increases.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said domestic factors, including recent cuts in fuel subsidies, and a slower external economic environment could lower the growth rate below 5% this year.

Costlier food and energy prices pushed Malaysia's May inflation to a 22-month high of 3.8%, even before the Government raised domestic fuel prices in June.

“We expect inflation to rise, especially in the month of June following one of the adjustments by the Government - the reduction in subsidies.

Therefore, for June, inflation is likely to be 6% to 7%,” Zeti told Reuters.

“We will monitor it very closely - whether this results in the pass-through to other consumer items and whether there are any second round effects like wage increases.

“And the central bank will be prompted to take action in the event that it becomes a generalised price increase.”

Zeti said when setting interest rates, the central bank had to assess effects of both higher inflation, as well as domestic and external factors moderating growth.

She said Bank Negara had no immediate plan to hike interest rates if inflation tapered in the second half in line with its forecast.

The cost of borrowing has stood at 3.5% - one of Asia's lowest - for the 17th straight policy-setting meeting.

“Interest rate is an instrument of policy to deal with demand-driven inflation,” Zeti said.

“Our interest-rate policy is forward looking. We will look at what the risks are - upside risks to inflation and downside risk to growth as a result of a slower external environment, and as a result of a moderating impact of higher energy prices.”

Asked if investors were wrongly betting on a possible quarter or half-point increase in interest rates, Zeti said: “The market is assessing it, based on a price increase, and it is not wrong to assess that indeed prices are going to increase, based on the adjustment Malaysia has taken.”

Zeti said the country's growth forecast was currently 5% and the central bank was announcing a revised forecast in July.

“It could moderate to some extent, below 5%, but we expect the economy to be on solid ground because it is highly diversified,” she said. – Reuters

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Maintain interest rates, say economists

PETALING JAYA: Concerns on stagflation and weaker growth are why some economists are advocating to keep interest rates unchanged.

According to Kuwait Finance House, a rate hike at this juncture would increase growth concerns and affect lending, especially to the retail sector.

Consumer sentiment had already plunged to a record low of 70 points, well below the 100-point level, the foreign research house said in a report.

CIMB-GK Research regional economist Song Seng Wun said the Malaysian economy faced downside risk with global demand slowing.

Furthermore, expectation of inflation is contained to a certain extent as employees may not be pushing too much for salary adjustments amidst slowing growth, therefore limiting concern of rising cost of doing business.

With global commodity prices retreating and coming off their peaks, inflationary pressures might also ease, Song said.

OSK Investment Bank, in a report Thursday, said an interest hike would erode earnings margin and beat down consumer sentiment.

“The hike in interest rates could widen the positive differential between the US Fed fund rate and the OPR (overnight policy rate), which will probably attract ‘hot money’ inflows into Malaysia,” it said.

An alternative to mitigate inflations would be to allow the ringgit to appreciate against the US dollar so that imports would be cheaper.

TA Securities in a report said the current inflationary environment was attributed to cost-push effects as demand most likely slowed in June as disposable income was crimped following the fuel hike.

“We expect that the OPR may remain at nine-month constant rate of 3.5% and Bank Negara may review it if the inflation rate break pass the 4% neutral level in the coming months,” the brokerage said.

Aseambankers shared similar views, noting that “gloomy economic outlook and recession warnings” had been issued by central banks and government officials in developed countries.

It expects Bank Negara to keep the benchmark rate unchanged at 3.5% when it meets Friday and for the rest of the year in order to sustain economic growth amid the growing risk of a weakening global economy and downside risk to domestic economic activities due to political and inflation factors.

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OPR maintained at 3.5%

KUALA LUMPUR: Bank Negara’s Monetary Policy Committee has decided to keep the Overnight Policy Rate unchanged at 3.5%.

Announcing this on Friday night after a day-long Monetary Policy meeting, Bank Negara said while the risks to higher inflation and slower growth have increased in the next 12 months, “the immediate concern is to avoid a fundamental economic slowdown that would involve higher unemployment”.

“Slowing growth itself will contribute to containing the potential for second round effects on inflation, thereby containing further increases in prices in the second-half of 2009. Given the underlying fundamental strength of the economy, and the resilient banking sector, the Bank’s assessment is that after this transitional period, the Malaysian economy has the potential to re-establish its medium term growth path,” Bank Negara said in a statement.

According to the central bank, the performance of the Malaysian economy in the first-half of 2008 has been driven by robust domestic demand and reinforced by favourable export performance.

“The recent major restructuring of domestic energy prices to bring prices closer to the substantially higher international prices is intended to reduce the fundamental distortions that it might create, and to ensure fiscal sustainability. These adjustments are expected to have a deflationary effect on the economy in the second half of this year and into the early part of 2009.

“The Bank is projecting inflation to remain elevated in the second-half of this year and into early next year before moderating towards the middle of 2009. The average inflation for 2008 is projected to be in the range of 5.5-6%. The inflation rate is expected to moderate in the second half of 2009 in the context of a more moderate growth environment.

“Currently, much of the significant rise in inflation is due to the increase in fuel prices. At this stage, the concern is for broader price increases and second-round effects, which would result in inflation being persistent. In such circumstances, the appropriate monetary policy response will be taken in order to maintain medium term price stability and ensure that the high inflation does not undermine the longer term growth prospects of the Malaysian economy.”

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Added on July 25, 2008, 8:43 pmRates: To raise or not to raise?

Some economists say interest rate hike can contain inflation

PETALING JAYA: Economists say any interest rate hike by Bank Negara following today's policy meeting will be carried out in response to the current inflationary pressure and to counter the negative real rate of return.

According to figures released by the Government on Wednesday, the consumer price index had risen to a 27-year high of 7.7% for the month of June largely due to the increase in fuel price and would likely stay at the same level this month following the hike in electricity tariff.

Daiwa Securities chief economist for Asia ex-Japan Prasenjit K. Basu said a hike in the overnight policy rate (OPR, the key interest rate that affects commercial banks' lending rates) was likely at the meeting. “Certainly by end-August there'll be a hike of 50 basis points,” he told StarBiz yesterday.

Basu said the central bank had a policy of maintaining a positive real deposit rate and would need to raise the OPR in order to maintain the policy. The OPR currently stands at 3.5% while banks' average one-year deposit rates stood at 3.70%.

Fortis Bank senior economist Joseph Tan said the country needed to raise rates to check inflation expectations as well as to avoid a negative feedback loop.

“If the market sees the country as behind the loop in containing inflation, the ringgit might weaken and this would increase the cost of imports,” he said, adding that Malaysia should not follow the path of Thailand and South Korea, which did not do enough to contain inflation.

Tan said while higher prices and the fuel price hike mainly drive inflation, other factors must also be considered to check on inflation expectations.

Kenanga Research economist Wan Suhaimie Saidi said in a research note that Bank Negara might revise the OPR upwards to 4% in the next six months with a 50% probability that there would be a 25-basis-point rate hike to 3.75% at the policy meeting.

He said the upsurge in consumer prices, along with the regional rate-tightening trend, had put the central bank's pro-growth policy in a quandary and posed an increasing challenge to maintaining the current monetary policy stance.

Given the current scenario, Wan Suhaimie said policy makers might be more focused on combating inflation and wrestling with the huge negative real rate of return.

Meanwhile, AmResearch Sdn Bhd said in an economic update that interest rates were likely to be adjusted upwards in line with the international trend.

Earlier in the month, the European Central Bank had raised its benchmark refinancing rate to 4.25% following a jump in inflation to over 4% due to surging oil prices. Closer to home, the Indonesian central bank had raised interest rates by 25 basis points each month in the last three months. Other countries in the region, including India, had also raised rates recently as they grappled with inflation.

AmResearch said a gradual increase in the OPR would be expected, with a 25-basis-point hike following the August meeting and another before year-end, which would put it at 4%.

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This post has been edited by David83: Jul 25 2008, 08:43 PM

Bank Negara expected to keep OPR at 3.5% in 2H

KUALA LUMPUR: Bank Negara Malaysia (BNM) is expected to keep the overnight policy rate (OPR) at 3.5% in the second half of this year due to the worsening external environment and slower domestic growth prospects, says CIMB Economic Research.

It said Monday the central bank’s decision to maintain the OPR at 3.5% last Friday was “appropriately calibrated, given the current weak economic environment and the outlook over the next six to 12 months”.

CIMB Research said BNM’s decision to keep the OPR unchanged matched its expectations and made it the 18th consecutive time that the rates were held steady since May 22, 2006.

The research house said the tone of the central bank’s policy statement was skewed towards the potential significant downside risks to growth.

“Besides the elevated global risks, BNM is concerned about the deflationary impact of higher fuel prices and tariff as well as rising inflation on spending and investment in 2H of 2008 and 1H 2009,” it said.

It added the central bank’s policy consideration was to avoid a fundamental economic slowdown that would involve higher unemployment.

BNM had raised this year’s inflation forecast to between 5.5% and 6.0% from the previous estimate of 4.2% made immediately after the fuel price adjustment.

CIMB Research said the central bank was most concerned about generalised price increases and second-round effects triggered by wage increases.

“Should this phenomenon occur, the central bank would not hesitate to act. We think the slowing growth environment will help to moderate price pressures and lessen the pressure on wage hikes,” it said.

Meanwhile, Kuwait Finance House (KFH) global research said Monday it also expected inflation to remain elevated in the next few months.

KFH said the higher inflationary trend was due also to the recent hike in electricity tariffs, which came into effect on July 1, and persistent price increases on the food and energy fronts.

It expected the Budget 2009 proposals to be announced on Aug 29 could contain several more measures to increase the government’s revenue for development purposes.

“There are high expectations that higher duties and taxes will be levied on tobacco and alcoholic beverages which would further impact the consumer price index,” it said.

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CIMB Bank lowers lending rates

KUALA LUMPUR: CIMB Bank Bhd and CIMB Islamic Bank Bhd will reduce their base lending rate (BLR) and base financing rate (BFR) by 25 basis points to 6.5% respectively with effect from Dec 1

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Association of Banks welcomes cut in OPR

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Maybank cuts BLR by 25 basis points

KUALA LUMPUR Malayan Banking Bhd has reduced its base lending rate by 25 basis points from 6.75% to 6.5% effective Dec 1.

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