StanChart: Key interest rate cut likely in Q3 2007

  • Business
  • Thursday, 21 Sep 2006

KUALA LUMPUR: Standard Chartered Bank (StanChart) expects Bank Negara to cut its key interest rate, or overnight policy rate (OPR), by 25 basis points in the third quarter of next year. 

StanChart global research economist Joseph Tan said the bank expected the OPR to remain at 3.5% until the first half of 2007. 

“The OPR is expected to remain flat until the second quarter of next year, and could be cut by 25 basis points in the third quarter,'' Tan said at StanChart's post-budget and post-International Monetary Fund (IMF) economic seminar yesterday.  

He said since Bank Negara did not raise interest rates last month, rates were likely to hold steady until the end of the year. He sees inflation moderating to 2.5% next year as the full impact of high fuel prices would have been felt in 2006.  

According to StanChart managing director Daniel Koh, the seminar was held to update its corporate customers on the latest direction of the Malaysian and Asian economies. 

In his opening speech, he said the Malaysian economy was expected to sustain its second half growth, supported by an increase in government spending, amidst signs of a softening global electronics sector and oil price pressures. 

Standard Chartered Bank (Hong Kong) Ltd regional head of economic researchNicholas Kwan (left) and Joseph Tan at the seminar yesterday

He said the expansionary Budget 2007 would counter the strong headwinds to growth of the local economy next year as Bank Negara's scope to cut interest rates in the short term was limited. 

On the IMF meeting in Singapore, Koh said the influence of emerging markets, especially Asia, was gaining momentum, particularly in global trade. 

“The role of the IMF should not only focus on global imbalances but also on global trade issues,” he added. 

Meanwhile, Tan said the forecast 6% gross domestic product (GDP) growth for Malaysia next year was achievable but a lot would depend on the “proper execution'' of the Budget 2007 measures. 

On this year's GDP growth forecast, Tan added that the bank's target was 5.5%, lower than the Finance Ministry's target of 5.8%. 

On other measures to achieve the growth target, Tan said the government could probably accelerate some of the programmes under the Ninth Malaysia Plan (9MP). 

“It seems right to front load some of the RM220bil allocation for 9MP during the first one or two years and slow down during the remaining years, depending on the economic conditions,” he said. 

He also said the government's revenue target from oil royalties, which made up 40% of revenue, could decline in line with falling crude oil prices. 

The Finance Ministry had earlier announced that the government's 2007 revenue could rise 11.8% to RM134.8bil due to high oil prices. 

Tan, however, said as oil price had declined from US$75 per barrel to about US$65, the royalties from oil could be “a very volatile component'' of revenue. 

He said the reduction in corporate tax rate to 27% next year and 26% in 2008 could also lead to lower revenue.  

On the ringgit's performance, Tan expects the local currency to continue to appreciate against the US dollar towards year-end and trade between RM3.60 and RM3.65 from December 2006 to September 2007. 

“The ringgit has been the third worst performing currency in the region since May 17 but it could rise on its own strength and appreciate further,” Tan said, adding that the issue was “not so much of the ringgit strengthening but a weakening of the dollar amidst signs of a slowing US economy.  

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