By LAALITHA HUNT | Feb 20, 2010
Bank Negara may leave rates unchanged for now
laalhunt@thestar.com.my
PETALING JAYA: Malaysia’s benchmark interest rates are expected to remain unchanged for the time being despite the US Federal Reserve raising the discount rate charged to banks for direct loans by 25 basis points to 0.75% yesterday.
Malaysian Rating Corp Bhd chief economist Zahidi Alias opined that Bank Negara would remain unperturbed by such an event as the interest rate differential with the United States was still in Malaysia’s favour.
Early this year, the central bank said it would continue to maintain Malaysia’s overnight policy rate at 2%.
However, Bank Negara signalled its readiness to normalise interest rates in due course as a pre-emptive move to prevent the build-up of financial imbalances.
“The focus now is more on sustaining the recovery of the economy through domestic economic activities,” Zahidi told StarBizWeek.
He added that to some extent, inflationary pressure may start to creep in but not to the point where Bank Negara would have to respond through an interest rate hike.
RAM Holdings Bhd chief economist Dr Yeah Kim Leng noted that Malaysia’s economic and interest rate cycles were not synchronised with the US’ cycles.
“The (Fed’s) move nevertheless lends credence to Bank Negara’s recently expressed intention to normalise interest rates sooner rather than later in the second half as perceived by the market.
“With the Fed signaling its confidence in the recovery pace, we can now expect with more certainty that Bank Negara will translate its intention into reality,” Yeah added.
The Fed yesterday announced a rise in the interest rate it charges banks for short-term loans but insisted that its first rate move since December 2008 would not raise borrowing costs for consumers or companies.
According to Reuters, the Fed’s decision was in response to improved financial market conditions that warranted less of a helping hand from the US central bank.
The Fed went to pains to draw the distinction between the discount rate and its target for overnight interbank rates – also known as Federal fund rate (FFR) – its main monetary policy tool, which remains unchanged near zero percent as a fragile US economic recovery struggled to gain traction, Reuters added.
“Typically, the spread between the discount rate and the FFR is about 100 basis points. Given that, we are not surprised if the Fed decides to raise its discount rate again as the current spread stands at 50 basis points,” Zahidi said.
He was also not overly concerned about the effects of the discount rate hike on US’ real economy as the Fed was still committed to its zero-interest rate policy and it had also said explicitly that the rate would remain low for an extended period.
“However, we should see some knee-jerk reaction in the financial market as the move would be seen by some quarters as a precursor to a monetary tightening,” Zahidi added.
Asian stocks, US stock futures and crude oil prices declined as the rise in discount rate spurred concerns the global recovery would slow down as stimulus programmes are unwound.
However, the US dollar registered its highest gains in nine months against the euro, trading at around 1.35 at 5pm local time yesterday.
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