KUALA LLUMPUR: Malaysian overnight policy rate (OPR) to be cut in the second half of 2007 if the inflation rate is below 3%.
Its economist (global research) Joseph Tan said the Malaysian OPR was expected to be at 3% by year-end from the current 3.5%.
“There is no point keeping interest rates too high if (it is) not necessary. If the consumer price index is already coming off, we expect inflation rate to be at around 2.5% by end of this year,” Tan told reporters after the Standard Chartered Economic Seminar: 2007 Outlook here yesterday.
He said Bank Negara was expected not to cut OPR in the short term as inflation rate was projected to stay at a high level before March.
On the Malaysian economy, Tan said it was expected to record 6% growth this year, helped by the increase in government spending ahead of the 2008 elections.
The additional government spending would offset pressure on the country’s exports due to the expected slowdown in the US economy this year, he said.
“Fiscal spending will rise ahead of the 2008 elections and to counter economic weakness,” he added.
According to Tan, 2007 will be a challenging year for the Finance Ministry to keep the budget deficit at 3.4% of gross domestic product due to higher government spending, decline in crude oil prices and cut in corporate tax rate.
He said falling oil prices currently affected crude oil exports and the situation indicated that the country’s revenue would be affected because of the heavy dependence on oil royalties.
In Budget 2007, the Government projected gross development expenditure to rise 24.3% year-on-year to RM44.5bil and forecast revenue to rise 11.8% year-on-year to RM134.8bil with 40% of the revenue from oil royalties.
“As expenditure rises more than revenue, the deficit target is likely to be missed,” Tan said.
On the ringgit’s performance, he said the local currency was expected to appreciate further against the US dollar at 3.47 by end-2007 with the weakening of the greenback against other currencies due to global imbalances.
Despite having risen to 3.50 against the dollar, the ringgit still had room to increase because it was still considered undervalued, he added. – Bernama