All eyes on Bank Negara meet

WITH inflation at a 26-year high last month, all eyes are on Bank Negara Malaysia's monetary policy committee meeting today to see whether it will raise the Overnight Policy Rate (OPR), the benchmark interest rate.

The committee has left the rate unchanged at 3.5 per cent since April 2006.

About 53 per cent of the research houses polled by Business Times were of the opinion that the central bank would raise the OPR at today's meeting.

Citi, which has maintained its call for a 25 basis-point increase, said the surprisingly strong headline inflation number and broadening of inflation pressures will strengthen the argument for a policy rate increase although questions remain as to its timing.

Kit Wei Zheng, the bank's vice-president for Asia-Pacific economic and market analysis, felt that Bank Negara may choose to delay the first rate increase to its next meeting in August or October although the OPR may be raised by 50 basis points by the year-end.

The current political situation may influence the timing of the rate increase, he said.

"The recent plunge in the MIER (Malaysian Institute of Economic Research) consumer confidence indicators could give Bank Negara an additional reason to stand pat for the time being, until fiscal-easing measures are announced to cushion the downside growth risks," said Kit.

He warned that failure to raise the interest rate could cause inflation expectations to come unhinged, leading to greater inflation persistence and a ringgit sell-off.

Standard Chartered Bank economist Alvin Liew argued that the worsening external outlook and domestic political uncertainties would keep the interest rate on hold.

"The inflation is largely cost-push and higher interest rates may not adequately address the issue.

"Furthermore, a higher interest rate is likely to further pressure consumers via higher lending and mortgage rates when consumers are (already) feeling the impact of the recent fuel price hike and higher food costs," he said.

Liew expects Bank Negara to keep the OPR at 3.5 per cent for the rest of the year, partly because of the Ninth Malaysia Plan initiatives to stabilise prices.

"This will relieve some upside cost pressures on essential items, and partly expecting economic growth to ease significantly going into 2009 while commodity demand softens at the same time."

AmInvestment Bank economist Manokaran Mottain is looking to a gradual increase in the OPR to tackle growing inflationary pressures.

He expects the second-round effect of increases in the prices of petroleum products to lift the inflation rate to eight per cent this month, which will also be the highest since October 1981.