Source from (The Star Online): http://biz.thestar.com.my/news/story.asp?file=/2012/2/2/business/10657067&sec=business
Published: February 02, 2012
They said the central bank's acknowledgement of continuing downside risks to Malaysia's growth signified it stood ready to reduce the country's benchmark overnight policy rate (OPR) amid easing inflationary pressure if local economic conditions worsened.
“Ongoing debt problems in Europe and a slow US recovery still pose significant risks to global growth. We do not rule out the possibility of rate cuts if domestic growth loses traction,” CIMB Research chief economist Lee Heng Guei said in an e-mail to StarBiz.
CIMB Research had earlier said it projected Malaysia's gross domestic product (GDP) growth to slow to 3.8% this year from an estimated 5% for 2011.
“At this juncture, the risks to growth and inflation are roughly balanced.
“We think that the door remains open for rate easing, given the weak global growth and domestic growth outlook and anticipated slower inflation,” Lee explained.
He believed the OPR would be reduced to the band of 2.5%-2.75% by the end of 2012 compared with 3% at the end of last year.
HSBC Global Research said it expected growth risks would dominate and compel the central bank to cut the OPR by 50 basis points during the first half of 2012.
“However, before Bank Negara embarks on this mini easing cycle, we would need to see a more sustained decline in inflation and further evidence of adverse global economic effects spilling over to domestic consumption and investment,” it said in a report.
Bank Negara on Tuesday announced its decision to maintain the OPR at 3% at least until the next Monetary Policy Committee (MPC) meeting on March 9. The move was in line with market expectations.
Governor Tan Sri Dr Zeti Akhtar Aziz had earlier said the current interest rates in the country were still supportive of growth.
According to the latest MPC assessment, the global environment would become more challenging in the months ahead and Malaysia's overall economic growth and inflation prospects would be affected by external developments.
Bank Negara said while the country's economy was expected to continue expanding, underpinned by sustained domestic consumption and investment activities, the external sector was already showing signs of moderation, with slower growth in exports and industrial production.
It pointed out that global economic and financial conditions had deteriorated in recent months because of the escalation of the sovereign debt crisis in Europe, the ongoing fiscal consolidation and the significant policy uncertainties.
On a positive note, the central bank said it expected the country's headline inflation, as measured by the consumer price index, to moderate this year.
This would happen as cost-push pressure would likely ease amid a slowing global economic activity that would alleviate pressure on key commodity prices, while the impact of domestic demand factors on inflation would likely be contained, it said.
Nevertheless, it said risks to inflation could still arise from supply disruptions that would result in higher food and commodity prices.
On that note, Bank Negara said the MPC would continue to “assess carefully the risks to domestic growth and inflation”.
Economists at Barclays Capital said they remained biased to maintain their base case that Bank Negara would keep the OPR unchanged in the first half-year.
“We sense that Bank Negara remains cautious but it is not prepared to provide any monetary accommodation just yet.
“On growth, the strong pipeline of investment projects, Government spending, stable labour conditions and large share of intermediate imports (roughly 65%) should help offset the negative impact.”
On inflation, Barclays said Malaysia was almost self sufficient in food and was a net exporter of energy, which meant that in terms of upside risks to commodity prices, particularly energy, the country was likely to benefit on the growth front.
Furthermore, palm oil, which is a key export commodity, had risen over 11% since October, providing a boost to private consumption, it said in a note.
“In our view, the probability of a rate cut is likely to rise if weaker global growth conditions spill over into the domestic economy faster than Bank Negara's expectation.
“This would appear in the form of higher labour retrenchments, weak credit disbursement, falling house prices and two to three months of sharp declines in manufacturing sector output,” it added.
Economists at Royal Bank of Scotland (RBS) concurred that the OPR would remain stable through the first half-year.
Expecting Malaysia's GDP to grow between 4% and 5% in 2012, RBS said although the growth rate was sub-potential, it was unlikely to motivate easing, as the level of growth rate was still supportive of employment growth.
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