Bank Negara holds off raising rates

Bank Negara kept the overnight policy rate unchanged yesterday despite the pressure to rein in rising prices, as policymakers placed priority on sustaining economic growth.

“While both the risks to higher inflation and the risks to slower growth have increased, the immediate concern is to avoid a fundamental economic slowdown that would involve higher unemployment,'' the central bank said in a statement issued after a scheduled monetary policy meeting.

Bank Negara was originally expected to announce the meeting's outcome at 6pm yesterday, but the announcement was delayed by nearly two hours.

Earlier, the market was split almost evenly on how they expected the central bank would deal with rising inflation in the country. The interest rate in Malaysia has remained at 3.5% since April 2006, and is among the lowest in Asia together with those in Hong Kong and Thailand.

The consumer price index (CPI) jumped to a 26-year high of 7.7% in June – or twice as high as 3.8% in May – as transport costs soared after the Government raised petrol and diesel prices at local pumps by 41% and 63% respectively.

Bank Negara said it expected inflation to remain “elevated in the second half of the year and into early next year before moderating towards the middle of 2009.”

“The average inflation for 2008 is projected to be in the range of 5.5% to 6%,'' it said. That is higher than the bank's earlier forecast of around 4% made at the start the year.

Before the meeting, a slight majority of economists polled by Bloomberg yesterday had targeted a minimum 25-basis-point hike in the interest rate to counter rising prices.

“Some would argue that Bank Negara is behind the curve to tame inflationary expectation, but the circumstance of different countries rule out 'one-size-fits-all' policy response,'' CIMB Research head of economics Lee Heng Guie said in a e-mailed response to StarBiz yesterday.

He expects slowing economic growth to moderate inflationary pressures going forward.

Lower crude oil prices in recent days also provided some respite for central bankers around the world to consider their response to counter the growing twin threat of high inflation and economic slowdown.

“Year-to-date inflation is only 3.7%. Therefore, Bank Negara must have considered that there is no urgent need to move the rate and put pressure to the economy,'' Associations of Banks in Malaysia president Datuk Seri Abdul Hamidy Abdul Hafiz told StarBiz yesterday after the announcement.

“It is a confidence booster for the business community,'' he said.

Bank Islam Malaysia Bhd senior economist Azrul Azwar Ahmad Tajudin noted that the high inflation in the country was not demand-driven but rather due to price adjustments in fuel and electricity prices.

But due to the relatively strong domestic economy, “Bank Negara still has the luxury of time to assess the impact and delay any rate hike plans,'' he said.

IJM Corp Bhd deputy chief executive officer and deputy managing director Teh Kean Ming said the decision to keep the interest rate unchanged was “good news” under the current economic and political environment.

“This will help the already-dampened property market and businesses at large. The financial market can now have a breather,” he said. - By IZWAN IDRIS (The Star)

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