Bank Negara holds key interest rate at 2pc

By Rupa Damodaran
Published: 2009/08/26

BANK Negara Malaysia has left borrowing cost unchanged at 2 per cent, citing improvements in domestic and global economic and financial conditions."With improving domestic economic conditions and as price pressures are expected to remain benign, the assessment is that the current monetary policy stance is appropriate and will continue to provide support for economic activity," the central bank said in a statement yesterday.

In keeping with market expectations, it has decided to maintain the Overnight Policy Rate (OPR), the key benchmark interest rate which determines banks' lending rates.Bank Negara said that indicators, including industrial production, financing trends, consumer and business sentiments, and retrenchments, reaffirmed the assessment that economic conditions were stabilising.

"The expectation remains that the domestic economy will improve in the second half of 2009 and into 2010 following a recovery in domestic demand amid stabilisation of the global economy," it said.Yesterday, Bank Negara's monetary policy committee held its sixth meeting for the year. Another two meetings are scheduled for October and November.

Alvin Liew, an economist from Standard Chartered Bank in Singapore, held the view that monetary policy would take a back seat for the rest of the year as fiscal measures exert a more visible impact on the Malaysian economy.Any change in rates would probably take place only by end-2010, he said.

Liew added that with Bank Negara being "pretty late" in initiating rate cuts last year compared with its regional peers, it might also adopt the same stance when restoring the cuts."It will want to ensure that the recovery is firmly entrenched before beginning to tighten," he said.Bank Negara noted that since the last meeting in July, more signs had emerged to suggest improvements in the global economic and financial conditions.

"Economic activity in some advanced and regional countries has begun to gradually recover in response to the significant fiscal and monetary measures that have been implemented," it said.However, economic recovery is likely to be a slow process as some of the economies undergo further structural adjustments, it added.

On declining inflation rates, Bank Negara said that negative inflation was expected to be temporary and to turn positive when domestic conditions strengthened.Inflation contracted 2.4 per cent last month, reflecting the cumulative fall in fuel prices since June last year.