BANK Negara Malaysia yesterday maintained the benchmark Overnight Policy
Rate (OPR) at 3.25 per cent, saying it is supportive of economic activities in the country against a stable inflation backdrop.
The prospects for the economy point to a steady growth path, said the central bank, with 6.2 per cent annualised growth recorded in the first quarter followed by 6.4 per cent for the second quarter.
Although domestic demand is expected to moderate, it will remain the key driver of growth apart from exports.
“While private investment activity is projected to remain robust, private consumption is expect ed to moderate,” it said, adding that exports will continue to benefit from the recovery in the advanced economies and from regional demand.
The last hike was announced during the July policy meeting where the OPR was increased by 0.25 basis points, after a three-year hiatus.
Market expectations pointed to a close call in the monetary policy decision yesterday, especially with the United States Federal Reserve meeting a day before.
The Federal Open Market Committee’s projections point to an initial hike in the federal funds rate only in the middle of next year and not earlier as widely anticipated.
CIMB Investment Bank regional economist Julia Goh said Bank Negara is taking a wait-and-see stance, in order to assess further data before deciding on whether to raise rates in the next meeting on November 6.
“It is quite apparent from the policy statement that priority has shifted to safeguarding the stability of household consumption and domestic growth. We believe the extent of the moderation would be a key factor in Bank Negara’s OPR decision in November,” she added.
If data points continue to soften, then the odds would favour a prolonged hold into 2015.
However, Credit Suisse’s Michael Wan described the policy note as neutral and data-dependent, which points to the likelihood of standing pat in the November meeting.
The research house’s analysis of past policy statements by Bank Negara since 2004 shows that the policy rate will be on hold in the next meeting whenever it says “assess the balance of risks to growth and inflation”.
“I think the key variable determining Bank Negara’s next move will be credit growth. If credit growth continues to moderate, as we do expect, Bank Negara will likely keep its policy rate on hold in the November meeting.”
Credit growth continues to moderate, down to 8.6 per cent year-on-year, from a peak of 11 per cent year-on-year at the start of the year.
On inflationary risks, Bank Negara said price pressures have stabilised as the effects of the price adjustments for utilities and energy have continued to diminish since the fuel price hike in September last year.
While inflation is expected to remain relatively stable for the remainder of the year, it is projected to edge higher next year and is expected to be above its long-term average due to domestic cost factors.
The central bank, however, cautioned that it will continue to assess risks to destabilising financial imbalances.
“Further adjustment to the degree of monetary accommodation may be taken depending on how new information will affect the assessment on the balance of risks, to ensure the growth prospects of the economy.”
Dr Chua Hak Bin of Bank of America Merrill Lynch, who was expecting a rate hike, said based on the cautious note of the central bank, the interest rate would likely be raised only next year.