Concerns about global growth will refrain Bank Negara from continuing with the upward normalisation of interest rates.
The overnight policy rate (OPR) was kept unchanged at 3% in the last policy meeting on July 7, although the statutory reserve requirement (SRR) was hiked by 100 basis points to 4%, but indications had been made after the previous monetary policy meeting that the move toward normalisation of interest rates was not yet over.
“For the next meeting in September, I think there is a high likelihood Bank Negara will maintain interest rates.
“With external headwinds likely to persist and with the rising risk of a double dip in the US, I think Bank Negara will only reassess the interest rate situation during their next meeting in November,” said CIMB Research economist Lee Heng Guie.
With inflation forecast to have peaked in June and with commodity prices falling, economist believe inflationary pressures will be reduced.
Malaysia's inflation rate, as measured by the consumer price index (CPI), hit a 27-month high of 3.5% in June this year, largely caused by a 4.7% rise in food and non-alcoholic beverages costs.
While MIDF economist Anthony Dass had initially forecast that Bank Negara may raise interest rates by another 25 basis points in the third quarter, he too thinks that interest rates will be maintained given the current scenario.
“What is happening now is an issue of confidence. If the interest rate is increased, this may speed up the process of slowing down the economy.
“It is too tricky to do anything right now,” he said.
Dass added that unless there was too much liquidity in the system, then Bank Negara might consider increasing the SRR.
Otherwise, current rates would be maintained until the economic situation improves.
“There are other concerns now for the global economy. There are 18 countries with a Triple A rating.
“People are wondering whether any of their credit ratings will follow the path of the US,” said Dass.
Last Friday, Standard and Poor's downgraded the credit rating of the United States government from the highest rating of AAA down to AA+.
Dass added that China faced the rising pressure of inflation. It reached a 37-month high of 6.5% in July.
“If China's inflation is at a tolerable level, then it is fine. But if it is not, and interest rates have to be increased, this will again create more problems,” he said.
Earlier in the week, the Federal Research in the US pledged to keep the Fed funds rate at exceptionally low levels at least through mid-2013, given increasing concerns of a double-dip recession.
The Fed acknowledged that growth haf been much weaker than initially anticipated and expected a slower pace of recovery going forward.
Labour market conditions have deteriorated in recent months, and the unemployment rate remains uncomfortably high.
The recovery continues to be dragged down by anaemic household spending, weak non-residential investment growth and a sluggish housing sector.
Other temporary factors such as the high food and commodity prices and Japan's supply chain disruptions also accounted for some of the weakness.
The Fed will also continue its policy of reinvesting principal payments from its securities holdings.
“While the tone of the meeting statement did not hint of another round of bond purchase programme or QE3, we think that the Fed will maintain a wait-and-see stance,” said Lee.
Meanwhile from Manado Reuters reported Malaysia will need to hold off from further rate rises to support an economy that is likely to see slower growth if the United States and European debt crises drag on, International Trade and Industry Minister Datuk Seri Mustapa Mohamed said yesterday.
Given the uncertain conditions, the Malaysian central bank, expected by economists to lift rates at its next meeting in September, should keep monetary policy loose, as the country had little leeway for fiscal stimulus at the moment, Mustapa told Reuters.
“It's important to ensure that we maintain easy monetary policy,” he added. “No hike in interest rates, like America,” Mustapa said in an interview on the sidelines of an Asia-Pacific trade meeting in Indonesia.
Malaysian annual inflation touched a 27-month high at 3.5% in June, reinforcing expectations of a 25-basis point rate rise in September.
Bank Negara surprisingly held interest rates steady at 3% in its last policy meeting on July 7 as it braced for growth to slow, but a downgrade to the US sovereign rating and escalating concerns over European debt have further worried export-dependent South-East Asian countries.
South Korea's central bank left interest rates on hold yesterday, in all likelihood setting a precedent for Asian policymakers forced to respond to the global economic slump.