TheEdge
KUALA LUMPUR: Bank Negara Malaysia (BNM) is unlikely in the near term to follow in the footsteps of the US Federal Reserve to reduce interest rates after the US central bank cut its benchmark fed fund rate by 50 basis points (bps) or 0.5% from 5.25% to 4.75% last week, according to CIMB Economics Research.
“We do not see any compelling reasons for BNM to cut interest rates given the balance of risk between economic growth and inflation,” it said in its research report recently.
Its chief economist Lee Heng Guie expected BNM to keep the overnight policy rate (OPR) unchanged at 3.5% for the rest of the year as long as domestic demand continued to expand at a healthy pace.
“We expect the OPR to remain stable at 3.5% for the rest of this year and is likely to hold steady in the first half of next year (1H08),” he told The Edge Financial Daily yesterday.
“With real interest rates staying positive amidst rising inflation risks, there is no strong compelling reason for BNM to change its monetary course as long as the economic growth and domestic demand expand at a healthy pace,” he said.
CIMB Research expects real gross domestic product (GDP) to grow by 5.8% this year and 6.3% next year.
On whether the interest rate differential will narrow further by year-end, Lee said that the interest rate differential had been in the US’s favour for more than a year, with the current yield gap between Malaysia’s and US’s interest rates continuing to stay wide at 125 bps.
“The yield gap is likely to narrow as we expect the Fed to cut rates further,” he said.
CIMB Research expects the growth in the consumer price index (CPI) to come in between 2% and 2.3% in the September to December period, mainly due to the low base.
“Although this trend is within our expectation, we would caution that higher food prices during the festive demand could push CPI growth higher in the months ahead. Nevertheless, we maintain our view that inflation will average at 2% in 2007 (3.6% in 2006),” it said in its report.
On the issue that possible adjustment in gas prices could fuel concern over inflationary pressures, it said it was likely that part of it, if not all, would be passed on to consumers should the government grant Petroliam Nasional Bhd’s (Petronas) request for an increase in gas charges.
It said a 20% increase in gas prices could result in consumer price inflation being nudged up by 0.1% to 0.2% points on a year-on-year (y-o-y) basis, assuming a direct pass-through to consumers.
Meanwhile, Aseambankers Equity Research also expected BNM to keep the OPR at 3.5% until the end of 2008. Commenting on rising world crude oil prices and inflationary risks in Malaysia, its economist Suhaimi Ilias expected inflation creeping up from 2.1% this year to 2.6% next year.
He said that the monthly inflation rate had already picked up for two straight months in July and August, and expected it to breach 2% y-o-y from September onwards, mainly from upward pressures on food prices due to seasonal demand during the string of festivities until Chinese New Year early next year.
“At the same time, we see the risk of the government resuming the gradual cut in fuel subsidies in 2H08, taking cue from the lower Budget 2008 allocation for subsidies to RM10.2 billion from RM12.2 billion in 2007 amid the environment of higher crude oil prices,” he said.
“However, we believe that BNM is comfortable with the inflation rate between 2% to 3%, given that our 2007-2008 inflation rate forecast is below the long-term average of 3.8% per annum,” he said.
Suhaimi also did not expect BNM to react to the Fed’s interest rate cut due to inflationary pressures, and on grounds that the government was confident of the economy sustaining real GDP growth of between 6% and 6.5% in the 2007–2008 period.
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