Europe crisis clouds Malaysia key rate call

Europe’s debt crisis and signs of a slowdown in global growth are complicating Malaysia’s decision on interest rates as a pickup in inflation coincides with dimming prospects for export gains.

Bank Negara Malaysia will raise its benchmark overnight policy rate to 3.25 percent from 3 percent at its fourth meeting of the year, according to 10 of 15 economists surveyed by Bloomberg News. The rest expect no change. The central bank will release its policy decision at 6 p.m. in Kuala Lumpur tomorrow.

The likely discussion tomorrow may echo debates across the Asia-Pacific region, which has led global growth and where policy makers have enacted the steepest increases in borrowing costs.

While India, South Korea and Thailand opted to raise their key rates last month, China and the Philippines asked lenders to set aside more cash as reserves instead.

"The rates call is 50-50,” said Matthew Circosta, an economist at Moody’s Analytics in Sydney. “Bank Negara Malaysia will be mulling global worries against domestic inflation pressures.”

European finance ministers have authorized an 8.7 billion- euro ($12.6 billion) loan payout to Greece by mid-July, pulling the country back from the brink of default and gaining time to hammer out a formula for ending the debt crisis.

Economic growth in the U.S. slowed to a 1.9 percent annual pace in the first quarter from 3.1 percent in the previous three months and the unemployment rate has climbed back above 9 percent.


Over Adjustment?


Malaysia’s inflation accelerated to the fastest pace in more than two years in May as consumer prices rose 3.3 percent. Bank Negara has raised the benchmark rate by a percentage point since the beginning of March 2010 to curb inflation, most recently a quarter-point increase at the last meeting in May.

Governor Zeti Akhtar Aziz said last month central banks around the world should be wary of an “over adjustment” in their response to faster inflation. Malaysia has raised rates four times and doesn’t want to overreact, she said in an interview with Reuters Insider.

Banks are charging each other 30 basis points more than the benchmark policy rate for three-month loans, according to the Kuala Lumpur Interbank Offered Rate, signaling expectations for higher interest rates and bank reserve requirements.

Interest rate swap forwards show traders are pricing in 43 basis points’increase in lending rates between September and June next year.

The Malaysian ringgit has jumped more than 6 percent against the dollar in the past year, and reached 2.9598 against the U.S. currency on May 2, the strongest level in 13 years. It traded at 3.0088 as of 6 p.m. local time yesterday.


Power Prices


Officials may also consider increasing the statutory reserve requirement level to 4 percent from 3 percent, nine of 14 economists predict. The central bank last raised the reserve requirement in May, saying it was a “pre-emptive” measure to manage a “significant” buildup of liquidity.

Malaysian Prime Minister Najib Razak’s government allowed national power distributor Tenaga Nasional Bhd. to raise electricity charges for the first time in almost three years in June, adding to price pressures for business and consumers.

“Inflationary pressures are expected to continue to climb,” said Daniel Wilson, an analyst at Australia & New Zealand Banking Group Ltd. in Singapore.

“Demand-side pressures will be fuelled by a tightening labor market and positive consumer sentiment. We believe the proactive Bank Negara Malaysia will hike rates.”

Consumer prices may climb 2.5 percent to 3.5 percent this year from 1.7 percent in 2010, the central bank said in March. - Bloomberg