Published April 22, 2009

Analysts expect M'sia to cut rates next week

They cite declining inflation prompted by lower fuel prices

By S JAYASANKARAN
IN KUALA LUMPUR

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ON April 29, Malaysia's central bank will meet to consider monetary policy, whether rates should stay put or be cut further.

Some analysts are betting that the central bank will cut its overnight policy rate by 50 basis points to 1.5 per cent, a historic low. Since November, the central bank has cut the rate by 150 basis points and that's flowed through into the wider banking sector with the base lending rate falling by 120 basis points to 5.55 per cent.

The main reason, economists said, is declining inflation prompted by lower fuel prices. Inflation, as measured by the consumer price index, is expected to drop to 3.6 per cent in March from a year ago. It was 3.7 per cent in February.

Rising fuel prices last year caused inflation to reach a 27-year high last July to 8.5 per cent. With falling oil, the government has since cut pump prices to RM1.80 a litre from its peak of RM2.70 last year.

The other reason for the central bank to cut rates is the possibility that Malaysia has entered a recession. This hasn't been borne out by hard data yet but the majority of economists think so given the continued fall in exports and growing unemployment.

The anticipated rate cut will also benefit indebted consumers and companies, an issue that the central bank is especially concerned about given the potential of rising non-performing loans in the banking sector as asset qualities deteriorate in a contracting economy.

Manokaran Mottain, an economist with the Arab- Malaysian banking group, thinks that 'we may have entered a period of sustained low inflation.' He estimates inflation for the whole year to be around 2 per cent but concedes that prices could begin rising near year-end as the government's stimulus spending begins kicking in.

The government recently announced a RM60 billion (S$24.8 billion) stimulus plan, out of which RM15 billion is to be directly spent through infrastructure projects.