TheStar
PETALING JAYA: Concerns on stagflation and weaker growth have led some economists to recommend keeping interest rates unchanged.
According to Kuwait Finance House, a rate hike at this juncture would increase growth concerns and affect lending, especially to the retail sector.
Consumer sentiment had already plunged to a record low of 70 points, well below the 100-point level, the foreign research house said in a report.
CIMB-GK Research regional economist Song Seng Wun said the Malaysian economy faced downside risks with global demand slowing.
Furthermore, expectation of inflation is contained, to a certain extent, as employees may not be pushing too much for salary adjustments amidst slowing growth. This limits concerns on the rising cost of doing business.
With global commodity prices retreating and coming off their peaks, inflationary pressures might also ease, Song said.
OSK Investment Bank, in a report yesterday, said an interest hike would erode earnings margins and beat down consumer sentiment.
“The hike in interest rates could widen the positive differential between the US Fed funds rate and the OPR (overnight policy rate), which will probably attract ‘hot money’ inflows into Malaysia,” it said.
An alternative to mitigate inflations would be to allow the ringgit to appreciate against the US dollar so that imports would be cheaper.
TA Securities in a report said the current inflationary environment was attributed to the cost-push effect. Demand had most likely slowed in June as disposable income was crimped following the fuel price hike.
“We expect that the OPR may remain at the nine-month constant rate of 3.5% and Bank Negara may review it if the inflation rate breaks pass the 4% neutral level in the coming months,” the brokerage said.
Aseambankers shared similar views, noting that a “gloomy economic outlook and recession warnings” had been issued by central banks and government officials in developed countries.
It expects Bank Negara to keep the benchmark rate unchanged at 3.5% when it meets today and for the rest of the year. This is to sustain economic growth amid the growing risk of a weakening global economy and downside risk to domestic economic activities due to political and inflation factors.
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