Business

Tuesday August 25, 2009

Bank Negara likely to leave rates unchanged

By YEOW POOI LING


Economists cite growing signs of improvement

PETALING JAYA: Bank Negara is expected to keep interest rates unchanged at 2% at the monetary policy meeting today due to stronger signs of economic troughs, economists said.

“Given more signs of improvement in both domestic and external conditions, we believe Bank Negara prefers to sit tight, allowing the impact of previous rate reductions and accelerating fiscal pump priming to flow through the economy,” CIMB Investment Bank Bhd economic research head Lee Heng Guie said in an e-mail reply to StarBiz.

Bank Islam Malaysia Bhd senior economist Azrul Azwar concurred, adding that the central bank might not want to “overshoot” in using interest rates to stimulate growth although deflationary trends in the last couple of months provided further room for cuts.

“One must remain vigilant and maintaining interest rates is part of the vigilance. It’s not the end of the tunnel yet as far as the recession is concerned,” he said.

RAM Holding Bhd chief economist Dr Yeah Kim Leng said consumer spending in the United States and Europe was still being weighed down by high unemployment and low savings rates.

“Some of the stimulus packages are also expiring and coupled with weak consumer sentiment, the recovery of the global economy seems fragile,” he said, adding that high deficits might lead to inflationary pressures.

United Overseas Bank Ltd economist Ho Woei Chen said the central bank had indicated that the present benchmark rate of 2% was conducive for growth and comfortable enough for businesses.

“When inflation rate inches up and there is evidence of the economy rebounding, it will be timely to raise interest rates,” she said.

The foreign bank expects the central bank to raise rates by the third quarter next year, in line with the expectation that the US Federal Reserve would make a similar move in the same period.

“We expect South Korea and Indonesia to tighten interest rates earlier, in the second quarter of next year, because of economic recovery and higher inflation,” Ho said.

Yeah said any policy change would only happen after there were signs of rising consumer and investor confidence, which translates into higher demand.

“The upward revision in interest rate is not expected until the recovery in both export and domestic demand is rooted more firmly.

“Given the gradual recovery pace as well as the various risks to consumer spending in the recession-hit developed economies, we see Malaysia’s interest rate staying at the current level for several more quarters,” he added.

Lee, meanwhile, noted that headline inflation in most developed and Asian economies now had either cooled off significantly or dipped into deflation zone.

However, he said, inflation might tick-up given the recent recovery in global commodity prices and normalising of the statistical base effects from the oil price shocks last year.

Furthermore, the extremely loose monetary policies might cause a liquidity-driven asset bubble and the monetisation of rising budget deficits would push prices higher, he said.

Lee added that excessive speculative investment in unproductive sectors would lead to the forming of new liquidity asset bubbles.

A prevailing low interest rate environment for too long could distort resource allocation and make growth unsustainable, he said.


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