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Bank Negara keeps borrowing costs unchanged [28-01-2011]  
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The Overnight Policy Rate, the key benchmark interest rate, was kept at 2.75 per cent

Bank Negara Malaysia (BNM) left borrowing costs unchanged yesterday as expected but warned it will have to manage the rising amount of money building up in the domestic financial system.

The Overnight Policy Rate (OPR), the key benchmark interest rate, was kept at 2.75 per cent at the monetary policy committee's first meeting for the year.

The central bank said the level is consistent with its assessment of economic growth and inflation prospects.

It was a market-anticipated move, which is expecting hiking cycle to start in its next March 11 meeting.

Wu Kun Lung, economist with Credit Suisse, thinks BNM will be in no hurry to resume its rate hike and will only do so in the second half of the year.

"In our view, output remains below pre-crisis level and demand-pull inflation is likely to stay low until the export sector recovers."

Standard Chartered Bank economist Alvin Liew said BNM did not prepare the market for more hikes but inflation was featured more prominently.

He anticipates the OPR rising to 3.5 per cent by mid-2011, as inflation expectations are likely to rise with more economic activities, higher commodity prices and gradual subsidy cuts.

The monetary policy committee said the large and volatile shifts in global liquidity are leading to a liquidity build-up in the domestic financial system.

"While the liquidity in the financial system has been manageable, going forward, additional policy tools such as the statutory reserve requirement and macro-prudential lending measures may be considered to avoid the risks of macro economic and financial imbalances," it said.

BNM said in the Asian region, where growth has moderated amid weaker external demand, domestic economic activity continues to provide strong support to growth.

"The region is also being affected by global inflationary pressures arising from the higher commodity and food prices."

The Malaysian economy, BNM said, is likely to grow at a steady pace in 2011, underpinned by continued firm expansion in the domestic demand amid more moderate external demand.

As for inflation, it said, the rise to 2.2 per cent in December was mainly on higher food and energy prices.

"Prices are expected to increase at a modest pace in the coming months, driven primarily by rising global commodity and food prices.

"Inflation will continue to be driven by supply factors with limited evidence of excess demand exerting pressure on prices," BNM added.

Credit Suisse's Wu said if oil prices were to rise further, the government may hike fuel prices more frequently to reduce subsidy costs.

"We estimate that if the government were to liberalise fuel prices at the current prices of around US$90 (RM274.50) per barrel, it would add about 1.5 per cent to 2 per cent to headline inflation, bringing year-on-year inflation to 4 per cent or more.

"Another way to reduce cost of subsidy is to allow further ringgit appreciation. If growth momentum gradually picks up in coming months as we expect, BNM might feel more comfortable in letting the currency appreciate further," Wu added.

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