Malaysia will consider tomorrow whether to raise interest rates for a third time this year as policy makers across Asia weigh the risks of faster inflation against threats to the global economic recovery.
Half of the 20 economists in a Bloomberg News survey predict Bank Negara Malaysia will increase its benchmark overnight policy rate to 2.75 per cent from 2.5 per cent tomorrow, while the other half expect no change. The central bank raised borrowing costs by a combined half a percentage point in March and May.
The split among economists mirrors a divergence between countries that are refraining from raising borrowing costs, such as Indonesia and the Philippines, and those that lifted rates in recent weeks, including India and Taiwan. A third increase would give Malaysia, among the first to act this year, more flexibility to reduce rates should the global rebound falter.
“Malaysia’s economic conditions warrant Bank Negara raising rates again and we think they will pause after another 25 basis-point increase,” said Ho Woei Chen, a regional economist at United Overseas Bank Ltd in Singapore. “At 2.75 per cent, it will give them room to cut rates if the global environment worsens.”
Governor Tan Sri Dr Zeti Akhtar Aziz raised the benchmark rate from a record low this year, calling it a “normalization” rather than a tightening of policy, as economic growth surged to the fastest pace in at least a decade in the first quarter.
Trimming Deficits
Governments in Europe are embarking on austerity programs to trim budget deficits and households in some of the world’s largest economies are holding back spending, suggesting the global rebound from last year’s recession may slow. Stock markets have tumbled amid signs the recovery is losing steam and more than US$7.5 trillion has been wiped from equities worldwide since this year’s high on April 15.
Malaysia’s economic growth may slow in the second half of the year because of “external factors,” Prime Minister Datuk Seri Najib Razak said yesterday. Exports by companies such as Sime Darby Bhd and Unisem (M) Bhd rose at the slowest pace in three months in May as sales to Europe and China eased.
“With the clouds of Eurozone worries hanging over the horizon and export activities probably now past their better days for at least the next few months, we anticipate the central bank will become more cautious,” said Wellian Wiranto, an economist at HSBC Holdings Plc in Singapore.
Not a Concern
Zeti said last month inflation is currently “not a concern.” In contrast, India has raised interest rates three times since mid-March to contain price increases.
Malaysia’s consumer prices rose 1.6 per cent in May, the biggest increase in a year. Inflation is forecast to average 2 per cent to 2.5 per cent this year, accelerating from 0.6 per cent in 2009, according to the central bank.
Inflation may become a problem for Asian nations should they continue to refrain from raising interest rates, Kenneth Rogoff, the Harvard University professor and ex-International Monetary Fund chief economist, said at a conference in Hong Kong yesterday.
Bank Indonesia kept borrowing costs unchanged at a meeting this week, while the Bank of Korea may do the same when its policy makers gather July 9, according to 10 of 14 economists surveyed by Bloomberg News.
The Reserve Bank of Australia left rates unchanged at its last two meetings after six increases since early October. The decision to return borrowing costs to “average” levels in May has given policy makers “the flexibility to await information on how the recent market uncertainty might affect the global economy,” the bank said in the minutes of its June meeting.
Standard Chartered Plc and Citigroup Inc. are among those expecting the Malaysian central bank to keep rates unchanged for the rest of 2010 after raising rates tomorrow.
“This is a close call,” said Kit Wei Zheng, an economist at Citigroup in Singapore. “We think a last 25 basis points’ hike would strike the balance between policy normalization, yet leaving rates sufficiently accommodative to support growth.” -- Bloomberg
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