TheEdge
KUALA LUMPUR: An upward interest rate revision now will exert further inflationary pressure that may result in an over-adjustment of the domestic economy, said CIMB Research head of economics Lee Heng Guie.
He said the likelihood of Bank Negara Malaysia (BNM) raising the overnight policy rate (OPR) at its next meeting on July 25 was slim, as this might not do much to stem the inflationary pressure brought about by the rising cost of food and raw materials.
“Judging from the recent remarks, the central bank governor has downplayed the expectations of an imminent rate hike or aggressive rate hikes unless there is a generalised price increases.
“We expect BNM to remain on the sidelines, keeping the OPR unchanged at 3.50% on 25 July given the greater uncertainties surrounding growth and inflation outlook,” Lee told The Edge Financial Daily.
BNM’s dilemma in balancing inflation and downside risk to growth is one that is being played out all over Asia as the region’s economies are being pressured externally and from within to use interest rates as the monetary tool to stem the tide of rising prices, and not intervene in the foreign exchange sphere.
While the US dollar may be weakening against other global currencies, many of the major Asian currencies have been on the declining trend against the greenback given the apparent unsuccessful attempts by the region’s central banks to intervene in the forex market.
As a result, calls for central banks to raise interest rates have been gaining momentum on the argument that a tightening monetary policy could also help in strengthening the local currencies and thereby, help to a certain extent to ease import-driven inflation.
BNM has kept its OPR or rates financial institutions charge for overnight borrowing between banks unchanged at 3.5% since April 2006.
Nonetheless, economist Gundy Cahyadi of Ideagobal in Singapore last Thursday was quoted by Bloomberg as saying that Malaysia was not under pressure to raise interest rates to support the ringgit.
“(Malaysia is) a net exporter of oil, and runs a current account surplus of about 15% of the country’s GDP (gross domestic products), and there isn’t a lot of room for Malaysia’s central bank to raise interest rates. So, there’s some need for a stronger currency,” he had said, on reports that Malaysia’s and Singapore’s currencies rose on speculation that their central banks would intervene in the forex market.
CIMB’s Lee said: “Cost-push inflation is harder to deal with than demand-pull inflation. Already, the combined impact of slower external environment and higher fuel and tariff hikes, along with rising costs would exert deflationary income impact on domestic demand and, hence, would moderate inflationary pressures.”
Lee added that inflation had surged to 3.8% in May, a 22 month high primarily due to the higher prices of food and expected inflation to hover around 5.9%-6.6% for the rest of the year.
BNM governor Tan Sri Dr Zeti Akhtar Aziz recently said that the country’s inflation rate for the month of June may rise to between 6% and 7%.
DBS Research recently said it did not expect BNM to be over-aggressive, but would raise the OPR by 50 basis points point to 4% on July 25. “Risks to growth are rising and a sharp rise in policy rates would slow growth considerably, and more policy tightening should not be necessary,” it had said.
The ringgit slumped more than 2% in the second quarter, snapping a six-quarter winning streak. It closed at 3.268 to the US dollar on Friday.
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