All eyes on rate meeting

  • Business
  • Saturday, 20 May 2006

PETALING JAYA: All eyes will be on Bank Negara's upcoming Monetary Policy Committee (MPC) meeting on Monday during which a decision on a fresh hike in interest rates could be made, but market expectations are divided on whether rates would be raised. 

Those who believe interest rates would be raised say inflation and the differential between Malaysian and US rates would be the key criteria, but those who don't think Bank Negara would move on rates say inflation will ease in the second half, and the more important consideration is the economy. 

“There will be a case for higher rates looking at the inflation data, but the expectation is that inflation will ease in the second half of the year,'' said the head of research of a local broking firm. 

Inflation reached its highest level since the Asian financial crisis in March when the consumer price index (CPI) rose to 4.8% on a year-on-year basis. 

The CPI growth rate eased slightly to 4.6% in April. Global inflation has been on the uptrend as crude oil prices and commodity prices continue to march upwards. 

Bank Negara's MPC raised the overnight policy rate by 25 basis points to 3.5% on April 26.  

In a statement released after that meeting, Bank Negara said the external and domestic economic fundamentals were still strong, and that while inflation reflected rising costs, the policy rate only needed to respond to new developments and information that became available, going forward.  

Bank Negara expected inflation to be higher in the first half of 2006 and moderate during the second half. It also said the current rise in inflation had been built into the earlier forecast of average inflation for 2006. 

Those who see domestic interest rates being raised cited the latest data from the US, which showed that inflation had risen faster than expected. 

That increases the probability that the US Federal Reserve would continue to firm up the Fed funds rate, an expectation that sent global markets falling sharply over the past week. 

The markets fear that higher rates would eventually bite into the US economic growth and curtail growth, apart from just keeping inflation in check. 

“Growth prospects for Malaysia are not under a big threat now and Bank Negara has some room for inflation targeting even though that is not its main priority,'' said an economist with a local brokerage. 

Although inflation may taper off in the second half of the year, one risk to that assumption is the potential rise in electricity tariffs by Tenaga Nasional Bhd

“There will be an impact but it is small,'' said one economist, who added that the weightage of electricity on the consumer price index was 3% compared with 7.4% for petrol. 

The economist did not discount the fact that higher electricity charges could indirectly filter into prices, but said this would take some time to build up. 

“Interest rates are still on the easy bias side so there is room for Bank Negara to bump it up,'' said one analyst. “It is still below the neutral rate.''

For Bank Negara statements click here

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