Rate cut likely to be put on hold

Conditions may seem ripe for Bank Negara to cut interest rates at the monetary policy meeting on Friday but economists feel the central bank may leave rates unchanged for the moment.

Domestic economic indicators still show some strength and economists feel interest rates would only be cut should there be signs of a precipitous decline in the economy.

“There are no worrying signals yet and I don’t think Bank Negara will rush to react,’’ said Aseambankers Malaysia Bhd chief economist Suhaimi Ilias. “Perhaps from Bank Negara’s standpoint, the economy is fairly resilient.’’

Worries have emerged over the health of Malaysia’s external trade and industrial production, but consumption indicators such as strong sales of cars in September and credit card repayments indicate the consumer was still in good financial health. This sends a mixed bag of signals on the health of the economy.

The possibility of a rate cut in Malaysia was floated by some after the Government on Monday released pre-emptive measures such as giving RM5bil to Valuecap Sdn Bhd and promising not to cut spending to stabilise the economy. Details of the full package would be known on Nov 4.

The Government’s move was in response to external-led economic worries, which have led to a number of countries to introduce fiscal measures with deep cuts in domestic interest rates.

Those countries have slashed interest rates over the past few weeks to keep growth rates up on concerns over the repercussions from a financial meltdown in the US.

A similar argument for Malaysia could be made but economists were quick to point out that Bank Negara kept interest rates steady in the past even though other countries were raising rates to stem off inflationary pressures. Those interest rate hikes were made prior to the financial crisis in the US.

“At this point, there is ample liquidity in Malaysia,’’ said RAM Holdings Bhd chief economist Dr Yeah Kim Leng.

“When a market lacks confidence, it is not the rate cut that counts.’’

Yeah said there was a possibility of a cut in rates, but he too does not think it would take place at the end of the week.

He said that with real interest rates extremely low as they already were, any cut in the current global environment might not be as effective given the lack of confidence in the global capital markets.

Bank Islam Malaysia Bhd senior economist Azrul Azwar also felt that Bank Negara would keep interest rates unchanged.

“Come Nov 24, the date of the final meeting for the year, Bank Negara might have more or less a complete picture of the current economic trends in Malaysia,’’ he said. “If by then the economy does turn out to be worse, Bank Negara may cut interest rates then.”

Source: The Star Online
Date: 22/10/2008