Published July 28, 2009

Economists see Bank Negara holding rates steady at 2%

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(KUALA LUMPUR) Malaysia's central bank is expected to keep interest rates steady at 2 per cent for the fourth straight meeting tomorrow as it waits for recent fiscal stimulus and interest rate cuts to take full effect.

All 12 economists in a Reuters poll said Bank Negara Malaysia (BNM) would not reduce the key overnight policy rate further for now after consecutive rate cuts totalling 150 basis points between last November and this February.

The consumer price index fell 1.4 per cent in June from a year earlier, but deflation is expected to be shortlived due to bus and taxi fare hikes being implemented on Aug 1, economists said.

'Right now, there is a question mark over domestic demand. Some easing may still be needed,' said IDEAglobal economist Philip McNicholas, adding that there was still room for as much as a 50 basis point cut.

However, the central bank would probably stand pat for now as it waits for the full impact of the government's RM67 billion (S$27.7 billion) stimulus measures to kick in, while demand for manufacturing exports is expected to recover by the third quarter, other economists said.

A July 15 Reuters poll of seven economists showed that they expected Bank Negara to hold rates at 2 per cent until the end of 2010.

Asian authorities have cut interest rates and ramped up spending to shore up economies hit by the global recession. But as tentative signs of recovery emerge in some economies such as South Korea and Singapore, talk has turned to the timing of rate hikes to stem any inflationary impact from increased public spending.

Economists expect Thailand to hold rates at 1.25 per cent until the end of the year. Indonesia cut its rates on July 3 by 25 basis points to 6.75 per cent and indicated it was close to the end of its easing cycle. -- Reuters