Pressure mounts to raise OPR

Pressure is again mounting on Bank Negara to raise interest rates after inflation hit a record high of 8.5% in July.

Jupiter Securities Sdn Bhd research head Pong Teng Siew said the central bank must no longer delay taking action to cool the highest inflation rate in 26 years, before it got out of control.

“This kind of inflation rate gives the central bank no leeway to adopt a wait-and-see attitude any longer. We expect inflation rates to hover around 9% and may even touch double-digits if the central bank does not do anything about it,” he told The Edge Financial Daily.

The central bank is expected to release its stance on whether or not it would raise interest rates today. It had left rates unchanged the last time the monetary policy committee met in July, much to the surprise of economists.

Pong said based on his research findings, annualised inflation rates had increased about 4% month-on-month (m-o-m) early this year.

For the month of June, annualised inflation rate increases had jumped 47% m-o-m, after the government announced a price hike in fuel price, he said.

However, Pong said what was more worrying was that, the annualised inflation increases continued to rise 14% m-o-m for July.

“This rise is still very sharp, implying that second-round effects are already taking place,” he said, adding that several employees’ unions had begun negotiating for higher wages.

Additionally, Pong said the central bank ought to raise interest rates, as it would send the message to the economy that it was serious about bringing the inflation rate under control.

Apart from Singapore, Malaysia is one of the few Asian economies that have yet to raise interest rates on fears that it would impede growth. The country has kept its interest rates at 3.5% since May 2006.

“Bringing inflation rates down requires a concerted effort by all central banks, in which the Malaysian central bank ought to be a contributor as well, given that other countries had been willing to face growth contraction to do the same,” Pong said.

He added that if none of the central banks had raised interest rates, increases in commodity prices would be uncontrollable, leading to spiralling global inflation.

An analyst at a foreign research house said the central bank was still expected to raise interest rates, but it would not be surprising if BNM decided to hold its horses again this month.

The analyst said ideally the country’s interest rates should be tweaked 25-basis points this year and another 25 basis points next year, depending on the country’s GDP results and Budget 2009, which would be tabled on Friday.

Some economists said a 25-basis points rate hike might not be enough to curb the spiralling inflation.

However, RAM Holdings Bhd group chief economist Dr Yeah Kim Leng said although the central bank was still expected to raise interest rates to cool inflation, the pressure to do so might have decreased, as several central banks could begin cutting rates after seeing growth contraction in the EU and Japan.

“There are also signs of inflation rates declining in some countries such as China and Vietnam, whereas the US Federal Reserve has begun to support its interest rates instead of cutting it further, signifying that the worst for the global economy could be over,” he said.

Based on these trends, the BNM might again skip a rate hike today, said Yeah, whose comments came before the announcement of the July inflation rate last Friday.

“The central bank’s stand is that, it wants to wait and see if the higher inflation would cause second-round effects to the country’s economy before deciding to raise interest rates,” Yeah said, adding that the main concern of higher inflation, however, was triggering negative real interest rates in the country’s economy.

Yeah added that despite the view that the worst could be over for the global economy, the financial crisis could drag on until the first half of 2009.

“There will still be some bad news for the rest of the year and maybe even for the first six months of next year,” he said.

by The Edge Daily

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