Current monetary policy appropriate to support local demand

KUALA LUMPUR: The volatile external landscape has prompted several countries to reduce their benchmark interest rates to sustain domestic demand to mitigate the impact of weaker exports.

Australian policymakers slashed interest rates by 25 basis points (bps) this month to 4.5%. This is the country’s first interest rate cut since April 2009.
Indonesian policymakers undertook a 50bps reduction to a record low of 6% following a 25bps cut last month.

But since economic growth here is still sustainable and considering the country is in a negative interest rate environment, Bank Negara Malaysia (BNM) is unlikely to reduce the overnight policy rate (OPR) from 3% at this juncture, said economists, who also pointed at inflation — measured by the Consumer Price Index (CPI) — that rose 3.4% in October from a year earlier.

“It is still premature for BNM to cut interest rates,” Dr Yeah Kim Leng, RAM Holdings Bhd chief economist told The Edge Financial Daily.

He reasons that the country had posted strong GDP growth momentum in 3Q11, which is expected to flow into 4Q albeit at a slower rate. He said the current OPR at 3% is still appropriate to support domestic demand to mitigate the impact of slower exports to advanced markets such as the US and Europe.

The Malaysian economy expanded at a faster pace of 5.8% in 3Q11, due to firm domestic demand, driven by the expansion in both household and business spending as well as higher public sector expenditure. But whether the growth momentum can continue in 4Q is still uncertain due to the negative developments in the external economic environment, said BNM governor Tan Sri Dr Zeti Akhtar Aziz, RAM’s Yeah said growth across Asia, by virtue of intra-regional trade and investment, is sufficient to offset weakness in advanced economies in the US, Europe and Japan. While the global landscape is not expected to see a repeat of the impact seen during the 2008 and 2009 financial crisis, Yeah foresees a prolonged weakness in advanced economies against a backdrop of new shocks such as the European sovereign debt crisis and de-leveraging of debt in the US.

“The new shocks could prolong weakness in advanced economies by another three to five years. Hence, Malaysia needs to monitor the external trends closely, considering that we are an external trade dependent economy,” Yeah said.

The economist, who foresees a “shallow recession” in the eurozone, expects Malaysian exports to be further impacted in the coming months. Hence, he has forecast 4Q GDP growth in Malaysia to ease to the lower end of the 5% range for a full-year growth of 5%. He has also reduced his 2012 GDP growth forecast from 6% to 5.2%.

In a note dated Nov 22, RHB Research Institute anticipated that domestic demand will ease further in 2012 after moderating in 2011. This is due to slower growth in consumer spending and a slowdown in investment activities. However, the research house expects the implementation of Economic Transformation Programme (ETP) projects to provide some buffer in 2012.

Lim Seng Gim, head of the macro-economic section of the Ministry of Finance, who spoke at the “Macro Conference on Economic Outlook and Uncertainties in 2012” on Wednesday, said the Malaysian economy is on track to meet its private investment target for 2011 of approximately RM94 billion. As at end-September the country had achieved RM75 billion already.

Commodities, an important aspect of private investment especially for rural incomes and consumption, has had a strong track record thus far in the year.
“Rubber prices and palm oil prices remained very strong,” said Lim, adding that palm oil prices for the first 10 months of the year exceeded forecasts thanks to higher shipments to China and India.

Private investment is crucial to sustain the health of the economy amid global uncertainties. The target for next year is RM113 billion. This is expected to be supported mainly by the ETP, Lim said. He expects private investment will continue to accelerate next year, including investments in Iskandar Malaysia in Johor.

“I think next year is the tipping point for Iskandar ... When the physical infrastructure comes up, you can expect the investor confidence to increase,” he said.

myr didnt cut interest rate... interesting thought