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Banks hail BNM move to hold key interest rate

February 3, 2014

KUALA LUMPUR : ALTHOUGH expected, Bank Negara Malaysia's (BNM) Wednesday announcement to leave the Overnight Policy Rate (OPR) unchanged at three per cent carried a hint that downside risks to growth are slowly gaining prominence, analysts say. The central bank's rationale behind the unchanged OPR was the continued expansion of domestic demand as well as improved global prospects amid market volatility because of the US Federal Re-serve's tapering of its stimulus programme. BNP Paribas Corporate and Investment Banking and CIMB Research generally lauded the central bank's positive outlook on domestic demand and were not surprised at the unchanged rate. "Although BNM left the policy rate unchanged, the tone of the statement hinted downside risks to growth are slowly gaining prominence," said BNP Paribas in its economic research report. " China appears the main source of concern and as its problems are unlikely to be resolved quickly and external supports may prove weaker than expected. "Domestically, though much hinges on investment, high frequency indicators hint fourth quarter gross domestic product (GDP) will show sagging momentum. Barring a fuel price hike, this will likely tilt BNM towards a 25 basis points rate cut in March," it said. Meanwhile, CIMB Research shares BNM's positive assessment that the economy will continue to perform well, underpinned by continued consumer spending, robust investment activities lead by the Economic Transformation Programme projects and improving export performance," it said. However, it maintained that the central bank's biggest challenge is to convince markets that a change in its monetary policy is warranted, if economic conditions hold steady and domestic demand remains strong, thus reflecting the risk of demand-pull inflation along with cost-push inflation. Following the core inflation that crept up to 1.9 per cent in December 2013 from 1.7 per cent in November and BNM's focus on ensuring medium-term price stability, CIMB Research maintains its end-2014 OPR target of 3.00-3.25 per cent. Hong Leong Investment Bank (HLIB), meanwhile, expects BNM to hold OPR steady at 3.0 per cent in its March Monetary Policy Committee (MPC) meeting as it buys time to weigh the impact of a contractionary 2014 Budget and the sustainability of pass-through effect post- Chinese New Year . "The tightening of 25bps could now be earlier in May (instead of our base case of July) should domestic demand growth remain robust post- Chinese New Year , resulting in a stronger-than-expected inflation pass-through," it said. HLIB has reiterated its view that real GDP growth will remain steady at 5.0 per cent year-on-year in 2014, with positive contribution from net exports offsetting more moderate domestic demand growth. The firm also kept its 2014 full year CPI growth forecast at 3.0 per cent. Elaborating on the MPC's interest rate decision, HLIB said the committee's tone continued to remain relatively neutral despite a rising inflation trend, "The MPC continues to count on export improvement to counter an expected moderation in domestic demand growth,". it said..

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Source: Business Times (Malaysia)

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