Will Bank Negara seriously look into cutting benchmark interest rates in November's monetary policy committee meeting given the deteriorating external conditions and moderating domestic front in recent months or will it continue to signal a stable rates outlook?
Most economists expect the central bank to continue keeping the overnight policy rate (OPR) on hold at 3% in November (the last meeting of the year), although a hint of caution has entered into its policy statements since July on the external environment amid signs of moderation on the domestic front.
Hong Kong-based Societe Generale SA forex strategist Chong Wee Khoon told StarBiz that there was no urgent need for easing in Malaysia as government expansionary and fiscal programme would be positive in the near term. The OPR has been kept at 3% since July 2011.
“The external factor is unlikely to be the dominating factor for Bank Negara's decision. If it were true, we would have seen some pre-emptive measures,” Chong said.
Factory output as measured by the industrial production index fell in August for the first time on a year-on-year basis since July last year, as purchasing managers indices in the Asia-Pacific region slipped, denoting that re-stocking activities continue to be deferred due to low demand.
Asean's exports-reliant economies have also come under pressure due to the drop in exports, with Malaysia's August exports declining 4.5% year-on-year.
Economists expect the drop in external demand to hurt Malaysia's growth in the second half following the first half's 5.1% gross domestic product (GDP) growth. The Government expects GDP growth of 4.5% to 5.5% next year.
Furthermore, economists said a benign inflation environment would also argue against any rate cut. September's consumer price index, due to be released on Wednesday, would likely show moderate inflationary pressures, continuing a trend from the beginning of the year.
“We see no need for Bank Negara to manoeuvre OPR rate but expect the central bank to be more active in managing its currency strength especially under capital inflows pressure,” Chong said.
Only a substantial rally in the ringgit, he said, would call for an easing in the benchmark rate to counter-balance the currency impact.
Affin Investment Bank Bhd chief economist Alan Tan said while there were downside risks to the country's growth, the central bank would wait until there were clearer signs of a global economic slowdown before deciding to cut rates.
“There is scope to hold rates because central banks around the world have made concerted efforts to support growth; there will be a rate cut only if there is a sharp deceleration,” he pointed out, adding that the OPR would likely remain on hold until the second half of 2013.