Malaysia’s interest rate raised to 3.5%


Thursday April 27, 2006

Malaysias interest rate raised to 3.5%


PETALING JAYA: Bank Negara has raised the overnight policy rate (OPR) by 25 basis points to 3.5%. The ceiling and floor rates of the corridor for the OPR are correspondingly increased to 3.75% and 3.25% respectively.

The central bank said in a statement yesterday that with strong growth in world trade projected this year, the country would benefit directly through higher exports and better terms of trade due to the higher prices for Malaysias commodities.

Domestic spending was expected to be sustained while consumer spending was expected to be well supported by steady employment and income growth, favourable credit conditions and the positive effect of the favourable external performance, it said.

Bank Negara said the current higher prices were a reflection of rising costs and there continued to be limited evidence of the second-round effects.

Based on present and future expectations, the policy rate would therefore only need to respond to new developments and information that become available going forward, it said, adding that inflation was expected to be higher in the first half and moderate during the remaining six months of the year.

At this new level, the OPR continues to be below the neutral level. Going forward, monetary policy would balance the risks to price stability and sustainable economic growth, the central bank said.

RAM Consultancy Services Sdn Bhd managing director and chief economist Dr Yeah Kim Leng opined that the rise in the OPR was within expectations.

We are now at the early phase of the interest rate tightening cycle whereby the OPR would need to be raised gradually this year as the balance of risks shifts towards inflation rather than growth, he told StarBiz.

Yeah said Bank Negaras main concern had rightly shifted to real interest rates becoming negative due to higher inflation as this penalised savers and depositors and became a disincentive to savings.

The raise is also perhaps indicative of the likely strong growth experienced in the first quarter, he added.

Should the growth outlook continue to remain positive, the interest tightening cycle will continue as we expect inflationary pressures to remain. All in all, we would not be surprised by another two or three increases of 25 basis points by year-end to bring interest rates to a neutral level that would provide a balance between growth and inflation, Yeah said.

Another economist concurred, saying the increase in the OPR was to align it with the current macroeconomic conditions.

The interest rates in Malaysia are relatively lower compared with other countries regionally and the rise should be positive for the overall economy, he said.

Bank Negara raised the OPR on Nov 30 last year to 3% from 2.7%. It was raised again by 25 basis points to 3.25 % in February.

Meanwhile, Citigroup Global Markets said policymakers appeared increasingly confident the improving outlook for exports would help counter the drag from the fuel price hike on consumption to keep the economy on even keel.

We are bringing forward our projection increases, with Bank Negara likely to hike the OPR by 25 basis points each in May and July, to 4%, it said.