DOMESTIC interest rates are likely to go up by an estimated 25 basis points (bps) in the second half of next year, CIMB Research said.
Given that there is still ample domestic liquidity and subdued inflation numbers, Bank Negara is expected to maintain low interest rates for the rest of this year. We also expect Bank Negaras overnight policy rates (OPR) to stay at 2.7%, economist Lee Heng Gui said in the research houses latest report on rising US interest rates and their impact on the domestic economy.
Lee said even if the US Federal Reserve raised short-term interest rates this year, Malaysian rates would lag behind those in the US as the current interest rates differential continued to be in Malaysias favour, being higher by about 180bps.
Evidently, Malaysias interest rates have decoupled from the US rates since 2000, he said, adding that Bank Negara would continue to maintain the current monetary stance to support stronger private sector activity.
Despite the stronger economic growth projected this year, we expect the headline inflation to stay low at 1.6% year-on-year compared with 1.2% in 2003.
For the first five months of this year, the Consumer Price Index (CPI) grew by 1.1%, indicating the near absence of inflationary pressure, he added.
Lee said CPI was expected to grow by 2% next year against an expected 1.6% this year.
Adequate capacity, increasing competition and moderate imported inflation abroad would help to keep domestic price increases at bay, he said.
The ringgits depreciation against other non-US dollar currencies had had minimal impact on imported inflation as imports denominated in non-US dollars accounted for only a small share of total imports, Lee added.
In addition, the share of imported components in the CPI basket remains small, at about less than 10%, he said.
Meanwhile, Lee said domestic liquidity was expected to remain ample this year and next year, underpinned by the continued current account surpluses in the countrys balance of payments.
Bank Negara will continue to undertake active money market operations, mainly through direct borrowings, to mop up excess liquidity from the banking system, in order to keep rates low and stable.
As at end-April, the estimated excess liquidity absorbed by Bank Negara through money market operations rose to RM114.7bil from RM67.2bil a year ago.
Lee said there was no historical relationship between Fed rates and Malaysian rates.
There is no conclusive evidence that domestic interest rates are highly correlated with US rates, measured in terms of levels, direction as well as magnitude of rate changes, he said.
Lee said in 2001 and 2002, when the Fed cut rates aggressively to spur US domestic spending, Bank Negara generally held domestic rates steady, with the exception of one rate cut of 50bps.
This supports the notion that Malaysias monetary policy stance is guided primarily by domestic considerations, and to a lesser degree, by global developments.
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