Tuesday, August 26, 2008

Interest rates left unchanged

TheStar

Bank Negara: Current level of OPR consistent with outlook for inflation

PETALING JAYA: Bank Negara kept the benchmark interest rate unchanged at a scheduled meeting yesterday, as policymakers avoided raising borrowing cost that would further burden the domestic economy already stifled by high food, fuel and raw material prices.

The decision to maintain the overnight policy rate (OPR) at 3.5% was widely expected by the market. The ringgit fell for a third consecutive day against the US dollar at 3.3745 yesterday, its weakest level since late November last year.

“Bank Negara maintains the assesment that with the expected moderation in inflation in the medium term, the greater priority is to avoid a fundamental downturn in economic activity,” it said in a statement released after the meeting.

“The current level of the OPR is consistent with the outlook,” it said.

Prime Minister Datuk Seri Abdullah Ahmad Badawi last week reversed some of the hefty fuel price hike at local pumps since June as the crude oil price in the international market fell more than 20% from US$147 per barrel in mid-July to around US$115 yesterday.

The slight reduction in the fuel price would help curb price increases in the domestic market, JF Apex Securities said in an note before the decision on the interest rate was announced.

It added that fuel price cuts could be used as an “alternative measure to combat inflation”.

Inflation surged to a 27-year high at 8.5% in July and is expected to remain high till early next year, as prices of food and transportation jumped on soaring energy and commodity prices.

But declining prices of crude oil and rice from record levels in recent weeks have eased inflationary pressures worldwide.

Recent news reports indicate there are signs that inflation may have peaked in Europe, China, India and Singapore.

Slowing global economic growth outlook, with the United States on the brink of a recession and Japan already in one in the second quarter, is also curbing prices from rebounding quickly.

“Going forward, the central bank will maintain its focus on the medium-term outlook for inflation and growth, and will carefully assess global and domestic developments in setting the stance of monetary policy,” Bank Negara said in the statement.

Reuters news agency yesterday quoted Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz as saying the central bank would stick to its 2008 average inflation target of 5.56% despite the recent cut in fuel prices.

She also defended the central bank’s decision to keep interest rates unchanged, saying it had nothing to do with political pressures.

“We only take into account the economic, monetary and financial conditions in determining our interest rate policy,” Zeti told reporters.

Rates have been on hold since April 2006 and the central bank has been charged by some economists with risking its credibility by failing to respond to a surge in inflation with hikes.

“I have worked with four ministers of finance. None of them has ever given the central bank any directive concerning interest rate policy,” Zeti said

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