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Thursday July 5, 2012

Bank Negara expected to keep interest rate steady at 3%

By SHARIDAN M. ALI
sharidan@thestar.com.my


PETALING JAYA: Bank Negara is expected to keep the overnight rate policy (OPR) unchanged at 3% at its monetary policy committee meeting scheduled today as the domestic economy is still resilient enough to face external headwinds from the eurozone.

Bank Islam Research said Bank Negara might possibly choose to keep the OPR unchanged at 3% at this juncture.

“The threat to growth prospects has intensified but not collapsed and there are signs of resilience in domestic demand.

“Furthermore, there appears to be some relief, albeit possibly short-term, in financial markets after European Union (EU) leaders took steps to solve the fiscal debt crisis and concerns over risks of financial imbalances may also nudge Bank Negara to lean toward keeping the monetary policy unchanged over the immediate-term,” it said in a report yesterday.

Nevertheless, should Bank Negara unexpectedly lower the OPR as a pre-emptive measure against downside risk to global growth, Bank Islam expected policymakers to move at a moderate and measured pace and a reduction of more than 25 basis points (bps) in the OPR to below 2.75% was not envisaged.

Malaysia Rating Corp Bhd also did not foresee Bank Negara undertaking such a step in the near term due to the respectable growth performance in first quarter of this year. Athough the economy might continue to moderate in the near term, it should not be sufficient to induce the central bank to rush into a more accommodative stance.

“In addition, policymakers will likely be extra cautious about fiddling with the OPR as there is limited pass-through from short-term rates to longer-term borrowing rates and thus overall economic activity.

“Also, an overly accommodative monetary policy is inconsistent with Bank Negara efforts to contain expansion in already overstretched household balance sheets in the economy and the capacity utilisation rate in the manufacturing sector has continued to be above its median level,” it said in an economic research report.

Citi Investment Research also expected the OPR to remain at 3% for the rest of 2012, even though the July statement could strike a more dovish tone.

“Bank Negara governor has reiterated recently that interest rates remain appropriate' as the domestic economy continues to hold up.

“Inflation concerns have taken a backseat for now, as May headline consumer price index inflation fell further to 1.7% year-on-year on falling transport prices, though core inflation (ex food and transport) also ticked down.

“Nonetheless lingering pipeline pressures on core remain, especially if domestic demand picks up in the second half of theyear on the back of pre-election fiscal spending. Growth will have to slow much more sharply, with a material loss of jobs and/or contraction in credit, before concerns household debt are overcome and rate cuts are serious consideration,” it said.

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