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Interest rate held steady

March 11th, 2012 Leave a comment

PETALING JAYA: Policymakers at Bank Negara followed the lead of their regional peers by holding the key policy rate steady, as growth momentum moderated amid a slowdown in trade activity while upside risks to inflation remained.

The central bank, which maintained the overnight policy rate (OPR) at 3%, said in a statement that while global financial conditions had improved, downside risks to the global economy remained.

“The high global commodity prices continue to pose risks to inflation,” it said.

Bank Indonesia kept rates unchanged at 5.75% while Bank of Korea maintained the key interest rate at 3.25% for the ninth consecutive month on Thursday.

The move by Bank Negara was not a surprise to economists, who before the release of the statement, had said policymakers would continue to weigh growth concerns against inflationary risks.

Citigroup Inc senior economist Kit Wei Zheng said in a report that with emergency conditions that triggered the 2008/09 rate cuts not materialising, a rate cut did not seem to be under serious consideration now.

He pointed out that policymakers expect inflation to remain below 3%, assuming no adjustment to subsidies even after the elections.

“Household debt seems to be a more important factor driving rate decisions, as policymakers reiterated that macro-prudential measures will be ineffective if rates are not normalised,” Kit said.

Bank Negara noted that growth in the advanced economies remained subdued although concerns over the European sovereign debt crisis had abated while there were tentative signs of improvement in North America.

“In Asia, while growth continues to be supported by domestic demand, the growth momentum has moderated amid a slowdown in trade activity,” it said, adding that overall growth momentum was expected to moderate largely due to the weaker external environment.

The central bank said while headline inflation was expected to moderate in 2012, there were still upside risks to inflation emerging from supply disruptions as well as higher energy and commodity prices.

“The monetary policy committee will continue to carefully assess these evolving conditions and their implications on the overall outlook for growth and inflation,” it said.

Kit said triggers for a rate hike would be met on US economic data continuing on the upside for another two to three months, faster-than-expected implementation of the Economic Transformation Programme projects and if core inflation picked up.

“We maintain our view that the OPR will be kept on hold through 2012, with a possibility that the next rate move, which is likely in 2013, could be upward,” he said.

It said latest indicators and surveys of businesses pointed to continued expansion in private consumption and business spending in the local economy with domestic demand continuing to drive expansion.

“Private consumption will be supported by stable employment conditions, income growth and public sector measures. Investment activity will be supported by the domestic-oriented industries, the commodity sector and the public sector,” it said.

Source: The Star

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