Bank Negara ups interest rates

Thestar: Friday March 5, 2010

By YVONNE TAN

Overnight policy rate increased to 2.25%

yvonne@thestar.com.my
PETALING JAYA: Bank Negara raised its overnight policy rate (OPR) by 25 basis points to 2.25% yesterday, signalling the time was ripe to normalise interest rates with the improvement in economic conditions.
The Monetary Policy Committee (MPC) said the hike was to prevent any financial imbalance that could take place should rates remain too low for longer than necessary and said Malaysians should expect the rate of inflation to rise but remain moderate given the prevailing economic conditions.
The hike in OPR, the benchmark interest rate which determines banks’ lending rates, is the first increase in close to four years.
“The recovery in the global economy is progressing amidst continued policy support and improvements in financial conditions,” the central bank said in a statement yesterday.

Dr Yeah Kim Leng (left)expects an increase of between 75 and 100 basis points this year

It said going forward, domestic growth was expected to strengthen further, supported by domestic demand and continued improvement in external demand, particularly from the regional economies which had expanded strongly in the fourth quarter.
Malaysia recorded its first growth of 4.5% after three consecutive quarters of contraction in the last quarter after a combination of government spending, a lower inflation rate and accommodative monetary policy helped boost domestic demand.
“Given this improved economic outlook, the MPC decided to adjust the OPR towards normalising monetary conditions and preventing the risks of financial imbalances that could undermine the economic recovery process,” it said.
While external factors, including rising global commodity and food prices might exert some additional upward pressure on domestic prices, inflation was expected to remain moderate this year, Bank Negara said.
Domestic consumer prices rose for a second month in January, up 1.3% year-on-year.
The OPR has remained at a historical low of 2% since February last year amid a severe and fundamental economic downturn. “These conditions no longer prevail,” Bank Negara said, adding that the stronger growth performance in the fourth quarter affirmed that the economic recovery was “firmly established”.
Accordingly, the floor and ceiling rates of the corridor for the OPR were raised to 2% and 2.5% respectively yesterday.
RAM Holdings Bhd chief economist Dr Yeah Kim Leng described the hike both as a signal of the central bank’s confidence that the local economy recovery was on track and as a “gradual normalisation” of the historically low rates.
Bank Negara had earlier also indicated the need for the normalisation of rates, adding that any increase should be viewed as “normalisation” and not “tightening”, which is normally implemented to slow consumer demand in an overheated economy with high inflation.
According to Yeah, a “normal” level for the OPR is between 3.25% to 3.5%. He expects an increase of between 75 basis points to 100 basis points this year backed by improving economic conditions.
AmResearch Sdn Bhd senior economist Manokaran Mottain said the increase was within AmResearch’s expectations and believed that given increasing inflationary pressures, there would be at least another increase of 25 basis points this year.
“It is needed for a gradual move towards the normalisation of rates,” he said.
At the new OPR level, the stance of monetary policy continued to remain accommodative and supportive of economic growth, said Bank Negara yesterday.