Will BNM follow major central banks’ lead in cutting rates?

Analysts are mixed as to whether Bank Negara Malaysia (BNM) will cut the overnight policy rate this year, even as seven other central banks scrambled to do so in an effort to counter effects of the deepening global financial crisis.

An economist at a local research house said he expected BNM to cut the interest rate, held steady at 3.5% since 2005, by 50 basis points (bps) by the end of the year.

“However, it will be quite tricky for the central bank to do so, due to the current period of slower growth. BNM has also indicated that it is pursuing a pro-growth policy, rather than focusing on curbing inflation, which remained at 8.5% in August and July,” he told The Edge Financial Daily.

Meanwhile, another economist said Malaysia’s economy may perform better than expected, hence BNM may consider a 25-basis point rate hike by year-end.

The monetary policy committee will meet two more times this year, on Oct 24 and Nov 24.

However, CIMB Research head of economics Lee Heng Guie said it did not appear likely that BNM would cut rates this year, adding any rate cut may come in the first half of 2009.

He said while the central bank could stagger a 50-basis point rate cut in 1H09, this would hinge on the country’s growth, taking into account the impact from the US slowdown and financial crisis.

On Wednesday, the US Federal Reserve and five other major central banks worldwide enacted a concerted emergency interest rate cut, as the US financial crisis showed signs of spreading.

“The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted,” the central banks said in a joint statement.

The Fed cut its benchmark rate by 50bps to 1.5%, ahead of its scheduled Federal Open Market Committee meeting on Oct 28-29, while the European Central Bank and the central banks of the UK, Canada, Sweden and Switzerland also reduced rates by 50bps each, to 3.75%, 4.5%, 2.5%, 4.25% and 2.5%, respectively.

In a research note, CIMB Research said the central banks’ concerted action would only provide a short-term reprieve to shore up investor sentiment.

“Ultimately, decisive and comprehensive measures are needed to restore confidence in financial institutions and markets so as to ensure an orderly functioning of credit markets,” it said.

Hong Kong’s Monetary Authority also lowered the base rate charged through its overnight discount window yesterday, by 50bps to 2%. The decision came after a surprise 100bps cut in the spread of its base rate to 50bps above the prevailing US Federal Fund Target Rate, announced a day earlier. Hong Kong follows the US’ rate decisions as its currency is pegged to the US dollar.

Meanwhile, the People’s Bank of China and Australia also announced rate cuts, with China lowering its benchmark one-year lending rate by 0.27 percentage points to 6.93%, and Australia taking a one percentage point rate cut.

RHB Research said: “China shifted emphasis from fighting inflation to sustaining growth in July 2008, when the Communist Party’s top decision-making body, the Politburo, dropped any reference to maintaining a tight monetary policy.

“Signs of weakness in China’s economy, which has slowed for four quarters, span from industrial production to export orders and the sharp drop in stock prices.”

It added the country had also cut its one-year deposit rate to 3.87%, and the banks’ reserve requirement ratio by 50bps to 16%, effective Oct 15.

by Ellina Badri (The Edge Daily)

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