TheEdge
KUALA LUMPUR: Malaysia’s interest rates are still at the appropriate level and supportive of economic growth amid rising inflation, said Bank Negara governor Tan Sri Zeti Akhtar Aziz.
She said rising inflation was mainly due to rising costs and this might not be addressed by interest rates but other policies, citing the government’s recent plan to set up the National Price Council to tackle issues pertaining to price and cost of living.
“The interest rates are still below neutral and therefore it has not inhibited any contraction in borrowing. In fact, lending activities are still very robust — consumer lending as well as for small and medium enterprises (SME) and businesses,” she said after launching the Labuan International Business and Financial Centre yesterday.
She added funds were being raised in the bond market to finance the increased investment activities in the country, “so at this stage interest rates are still at the appropriate level”.
Zeti was asked to comment on the recent move by the US Federal Reserve to cut interest rates by 75 basis points to 3.5% to avert a recession. Bank Negara has kept its overnight policy rate (OPR) at 3.5% since 2006.
“We are having a monetary policy meeting tomorrow. We will discuss the new emerging trends moving forward and we will be issuing a monetary policies statement tomorrow,” Zeti said.
She added Bank Negara would also take into account the underlying trends and economic outlook. “We are not looking at conditions. We are looking three months, six months and 12 months down the road and we are going to make that assessment at the meeting,” she added.
She said the Malaysian economy had been growing steadily over the years amid the uncertain global outlook.
“We believe the Asian economy does have a high degree of resilience,” Zeti said.
“We are facing this period of uncertainty in the global environment from a position of strength and we have the capacity to deal with it.”
Meanwhile, economists expect the central bank to keep the OPR unchanged to remain supportive of domestic demand in the wake of increasing external risks.
CIMB economics research chief economist Lee Heng Guie said he expected the OPR to remain unchanged as the current interest rate level was sufficient to support domestic demand amid increased downside risks to global growth.
“Should growth and domestic demand falter, then a cut becomes likely,” he said.
Singapore’s DBS Equity Research said Malaysia’s economic growth and inflation was a balancing act and the 3.5% policy rate was still appropriate to curb inflationary pressure while being conducive to growth.
“We continue to expect the OPR to remain at 3.5% as Bank Negara watches the data on inflation and growth,” it said, adding Malaysia’s policymakers were vigilant about inflationary pressures due to high global food and energy prices and a possible fuel subsidy cut.
Meanwhile, CIMB’s Lee said higher inflation thus far has not been demand-driven but a result of higher global food and commodity prices and supply constraints.
He said estimates showed headline inflation could increase to between 3.3% and 3.8% in 2008 should there be an adjustment of petrol prices and other administered price increases.
Without a price adjustment, he expected inflation this year to remain benign at 2.3% compared to 2% last year.
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