Malaysia likely to leave rates unchanged

title=BANK Negara Malaysia is widely expected to leave borrowing costs unchanged but economists said it may carry out other measures to let some hot air out of the financial system and deal with rising prices of consumer goods and services.

The monetary policy committee will make a decision on the Overnight Policy Rate (OPR) today that stands at 2.75 per cent now.

So far, Thailand raised rates on Wednesday, and has indicated more tightening with the rise in consumer prices, a decision which follows China which did the same last month.

Bank Indonesia kept rates unchanged last week but indicated it would raise interest rates gradually.

Almost 90 per cent of those polled by the Business Times expect the central bank to stand pat with the current rate but they expect it to hike the Statutory Reserve Requirement (SRR) ratio this week.

Under the SRR, banks must keep part of their capital as reserve at the central bank. Raising this means banks would have less money to lend.

Credit Suisse economist Wu Kun Lung expects the SRR to be raised by 1-2 per cent to reduce the amount of money sloshing around in the financial system.

This excess liquidity could result in banks giving out easy loans, which could fuel speculation in certain parts of the economy.

Last year, BNM already put a cap on mortgages to deal with speculation in the properties.

"Loan growth rose to a decade-high 13 per cent in January and the momentum remained strong. More worrying was the strong rise in loans for property purchases (both residential and non-residential properties) and construction.

"We would not be surprised to see some macro-prudential measures such as reducing the loan-to-value ratio, on the property sector," he said.

The SRR ratio was cut to 1 per cent in March 2009 from as high as 4 per cent in October 2008.

OCBC Bank economist Gundy Cahyadi said raising the SRR is more likely as it was indicated by the last monetary policy statement in January.

"A rise (in SRR) arguably has little impact on the economy other than potentially affecting the commercial banks' profitability.

"We expect the BNM to continue asserting inflationary risks to the economy, which suggest that rate hikes may still be on the cards going forward," Gundy said.

While Malaysia continues to benefit from rising commodity prices, especially crude oil and crude palm oil, it also adds to rising prices and a heftier subsidy bill, notes Standard Chartered Bank.

"Even as we expect reforms on the subsidies to continue in Malaysia at a more measured pace, a sustained surge in oil price may force the government to accelerate the reform timing and increase the magnitude of the price hikes," remarked economist Alvin Liew.

He expects BNM to raise the OPR today and do another hike in the second quarter.

SOURCE: Business Times

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