Bank Negara expected to keep OPR at 3.5% in 2H

KUALA LUMPUR: Bank Negara Malaysia (BNM) is expected to keep the overnight policy rate (OPR) at 3.5% in the second half of this year due to the worsening external environment and slower domestic growth prospects, says CIMB Economic Research.

It said Monday the central bank’s decision to maintain the OPR at 3.5% last Friday was “appropriately calibrated, given the current weak economic environment and the outlook over the next six to 12 months”.

CIMB Research said BNM’s decision to keep the OPR unchanged matched its expectations and made it the 18th consecutive time that the rates were held steady since May 22, 2006.

The research house said the tone of the central bank’s policy statement was skewed towards the potential significant downside risks to growth.

“Besides the elevated global risks, BNM is concerned about the deflationary impact of higher fuel prices and tariff as well as rising inflation on spending and investment in 2H of 2008 and 1H 2009,” it said.

It added the central bank’s policy consideration was to avoid a fundamental economic slowdown that would involve higher unemployment.

BNM had raised this year’s inflation forecast to between 5.5% and 6.0% from the previous estimate of 4.2% made immediately after the fuel price adjustment.

CIMB Research said the central bank was most concerned about generalised price increases and second-round effects triggered by wage increases.

“Should this phenomenon occur, the central bank would not hesitate to act. We think the slowing growth environment will help to moderate price pressures and lessen the pressure on wage hikes,” it said.

Meanwhile, Kuwait Finance House (KFH) global research said Monday it also expected inflation to remain elevated in the next few months.

KFH said the higher inflationary trend was due also to the recent hike in electricity tariffs, which came into effect on July 1, and persistent price increases on the food and energy fronts.

It expected the Budget 2009 proposals to be announced on Aug 29 could contain several more measures to increase the government’s revenue for development purposes.

“There are high expectations that higher duties and taxes will be levied on tobacco and alcoholic beverages which would further impact the consumer price index,” it said.