Bank Negara likely to maintain key rate

By Rupa Damodaran
Published: 2009/05/25

BANK Negara Malaysia is widely expected to leave its benchmark interest rate unchanged at 2 per cent after its monetary policy committee meets tomorrow, economists say.A Business Times poll of 21 economists across Singapore and Malaysia were unanimous in their outlook of the Overnight Policy Rate (OPR), amid signs of bottoming out for trade and industrial production as well as a low inflation rate.

Standard Chartered Bank economist Alvin Liew said the central bank is likely to take its foot off the monetary easing policy pedal for now, with expectations of a gross domestic product (GDP) contraction in the first half of the year and the impact of the fiscal tap to flow in the latter half of the year.

"Instead, we believe the central bank will now switch its attention to lending, ensuring that banks are passing the rate cuts to borrowers and more importantly, ensuring the availability of financing to businesses and individuals," he said.

US investment bank Citi said Bank Negara's policy has shifted towards increasing credit availability, as evident by the launch of credit guarantee schemes recently.Its vice-president of Asia-Pacific economic and market analysis Kit Wei Zheng and analyst Leon Hiew said that the inflation reading is also unlikely to affect Bank Negara's decision.

"Although the government and central bank have already hinted that the official GDP forecast of 1 to -1 per cent for 2009 will be revised downwards, we believe this reflects a technical adjustment to the weaker-than-expected first quarter numbers rather than a fundamental change in view about the path of GDP," they said.

They said recent signs of bottoming, as seen in trade and production figures, coupled with low inflation rates would likely be sufficient to prompt Bank Negara and the government to stand put on further monetary or fiscal easing.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz was quoted as saying that overly low interest rates are not constructive and that the current monetary conditions are sufficiently accommodative, with rate cuts already front-loaded.OCBC Bank economist Enrico Tanuwidjaja said possibilities of further rate cut are there should growth trajectory threatened further due to a prolonged global especially US recession.

"Until the prospects of that comes into a close materialisation, we see the OPR to bottom out at the current 2 per cent for the remaining of this year," he added.TA Research economist Patricia Oh expects the OPR to be maintained at this moment, saying there are several economic indicators pointing towards a gradual recovery in Malaysia's economy.

"However, should there be anticipation for future economic weaknesses ahead, there are rooms for further interest rate reductions considering the downward pressure of a cost-push inflation," she said.