Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) at 3.5% after its Monetary Policy Committee (MPC) meeting yesterday. The decision came amid upside risk to inflation – which implies interest rate should go up, and downside risk to growth – which suggests interest rate should go down. Meanwhile, the US Federal Reserve’s on-going FOMC meeting (29-30 January 2008) is expected to again cut the fed funds rate by between 25-50bps from the current 3.5% which was the product of the emergency, inter-FOMC 75bps cut on 22 January.
However, we do not expect the US interest rate policy to have an effect on Malaysia’s interest rate policy, unless domestic demand takes a drastic turn for the worse. Therefore, we maintain our long-standing view that the OPR will stay at 3.5% this year to essentially sustain domestic-driven growth.
The upside risk to domestic inflation is being addressed via administrative measures like price controls, subsidies and the recently announced creation of the National Price Council and national stockpiles of essential food items, as well as via a stronger Ringgit exchange rate to contain import costs, while fiscal policy – via Government spending and measures to boost consumer and business spending – will deal with the downside risk to growth.
Moreover, keeping the nominal interest rate steady in the face of rising inflation means a falling – even negative – real interest rate that is also stimulatory to growth by encouraging spending and investments.
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