Published May 1, 2009

Bank Negara keeps rate unchanged

But consensus among private economists was for cuts between 25 and 50 basis points

By S JAYASANKARAN
IN KUALA LUMPUR

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A SECURITIES house based in Singapore has predicted that although Malaysia's central bank, Bank Negara or BNM, elected not to raise rates on Wednesday, it was not 'quite the end of the easing cycle' and that BNM could still cut rates by another 50 basis points in May.

On Wednesday, BNM opted to keep rates unchanged at 2 per cent although the consensus among private economists was for cuts between 25 and 50 basis points.

Since November last year, BNM has cut rates by 150 basis points and the current rates are at historic lows.

In its statement, BNM seemed to say that the prognosis for the economy was improving with an impending recovery in the second half of the year.

It acknowledged that the international financial system had yet to stabilise and the near term outlook was still weak but, at the same time, it noted that the pace of decline was slowing.

In addition, it expected the world economy to improve in the second half buoyed by the fiscal stimuli packages adopted by various countries.

On the local front, BNM said that it expected the economy to contract sharply in the first quarter and would remain weak throughout the second.

But it said that things would improve in the latter half because of greater government spending and an improved global economy.

For its part, BNM concluded that the current monetary measures would be sufficient to support domestic demand.

In a report yesterday, Morgan Stanley said that the statement 'suggests to us that BNM is unlikely to bring rates down to the sub-one per cent levels that we had originally envisaged'.

Even so, the house said it believed that BNM would still cut rates given that growth could be worse than expected.

'The triple whammy of manufacturing recession, commodity price reversal, and a change in political climate has not been fully factored into growth expectations,' Morgan Stanley said.

Indeed, the house view is that Malaysia's growth in real gross domestic product terms would contract by 3.5 per cent.

That is pessimistic compared to the consensus forecast of minus-0.7 per cent and the official view of flat growth.