KUALA LUMPUR: Bank Negara Malaysia (BNM) 26 Jan 2010 hinted of a sooner-than-expected interest rate hike after keeping the country’s overnight policy rate (OPR) unchanged at 2% at its first monetary policy committee (MPC) meeting for the year.

“Moving forward, monetary policy would remain accommodative to ensure that the economic recovery is well entrenched.

“At the same time, the MPC also recognises the need to ensure that the stance of monetary policy is appropriate to prevent the build-up of financial imbalances that could arise from interest rates being too low for a prolonged period of time,” the central bank said in a statement after the MPC meeting yesterday.

While most economists expect a rate hike only in the second half of the year, BNM’s latest statement could be seen as the strongest indication yet that a gradual rate hike, while remaining accommodative, may be on the horizon as local consumer prices escalate with economic recovery gathering momentum.

According to BNM, the global economic recovery continued to gather pace, supported by continued expansionary policies, improved financial conditions and strong rebound in several emerging economies.

BNM said while growth momentum in regional economies was expected to strengthen further this year, there was uncertainty on the prospects for advanced economies as their growth continued to depend on policymakers’ stimulus measures and sustainability of private sector demand against a backdrop of current financial system resolution  and reforms.

“In the domestic economy, recent economic indicators suggest that the economy expanded favourably in the fourth  quarter of 2009. Positive developments in manufacturing production, financing activity, external trade and labour market conditions reaffirm the assessment that the economic recovery is gaining strength.

“Going forward, the economy is expected to expand further in 2010, with growth being supported by strengthening  domestic demand, particularly private consumption, and further improvements in external demand,” BNM said.

Malaysia’s inflation rate turned positive in December last year, following six consecutive months of negative consumer price numbers.

According to the central bank, the change largely reflected the lapse of the impact from the retail fuel price adjustment in 2008.

Looking ahead, BNM foresees the pace of consumer price increase for the year to be gradual, reflecting the  prevailing economic conditions, and taking into account some adjustments in administered prices.

“In the absence of further price revisions and external influences, a positive but modest inflation rate is expected in 2010,” it said.

Meanwhile, AmResearch senior economist Manokaran Mottain said the research house was “convinced” that  BNM would raise interest rates in the second half of 2010.

“This is because inflationary pressure is going to accelerate faster in the second half of 2010,” said Manokaran who predicts policymakers initiating, for a start, a collective 50-basis point (bp) hike in two stages of 25bps each in the second half of the year. One basis point is one hundredth of a percentage point, or 0.01%.

However, Manokaran would not rule out a hike in the OPR in the first half of the year, in the April-June quarter, depending on the country’s fuel pricing policy which will be released on May 1.

The economist said a significant upward adjustment to retail fuel rates would result in higher consumer prices, hence a possible need to raise interest rates to tame rising inflation.

This is the seventh consecutive time BNM had maintained interest rates at 2% since April 2009. The central bank had slashed the OPR by a collective 150bps from November 2008.

Reference:

This article appeared in The Edge Financial Daily, January 27, 2010.

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