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Malaysia, Indonesia May Hold Interest Rates as Risks Cloud Global Recovery
Malaysian and Indonesian policy makers will probably keep interest rates unchanged this week to support their economies as the global recovery slows.
Fifteen out of 17 economists surveyed by Bloomberg News predict Bank Negara Malaysia will leave its benchmark overnight policy rate at 2.75 percent tomorrow after three consecutive increases, while two expect another boost to 3 percent. Bank Indonesia will keep its reference rate at 6.5 percent on Sept. 3, according to 16 out of 17 economists in a separate survey.
Most Asian central banks have raised rates in recent months to stem price pressures or normalize borrowing costs as the region led the world out of last year’s recession. The monetary tightening may slow as policy makers from the U.S. to Japan take steps to shore up growth amid signs the world’s biggest economies are cooling.
“While Asian central banks cannot ignore the strong growth in the region’s economies, they are likely to be wary of the uncertain prospects facing the U.S.,” said Rahul Bajoria, a Singapore-based economist at Barclays Plc. “Manageable inflation conditions give policy makers some leeway to balance growth and inflation” in most Asian nations, he said.
The U.S. Federal Reserve “will do all that it can” to ensure a continuation of the economic recovery, Chairman Ben S. Bernanke said Aug. 27, adding that growth during the past year has been “too slow” and unemployment too high. The U.S. economy grew at a 1.6 percent annual pace in the second quarter, less than previously estimated.
Japanese Stimulus
The Japanese government this week pledged 920 billion yen ($11 billion) in stimulus to protect the economy from slower growth and fallout from the yen’s appreciation. Officials will consider compiling an extra budget if needed, Prime Minister Naoto Kan said Aug. 30.
Malaysian policy makers led by Governor Zeti Akhtar Aziz have raised interest rates by 0.75 percentage point since the start of March to reduce what they say is the risk of financial imbalances that may be caused by keeping borrowing costs too low for too long.
A report last month showed the economy grew near the fastest pace in a decade last quarter, with gross domestic product climbing 8.9 percent from a year earlier. Zeti said growth may exceed 6 percent in 2010. Malaysia’s consumer prices rose 1.9 percent in July, the biggest increase in 14 months.
Slower Tightening
Malaysia’s monetary policy is “forward-looking” and the current rate is “consistent and appropriate” based on the outlook for inflation and growth, the governor said Aug. 18. The ringgit has gained 9.3 percent against the dollar this year as the economy strengthened, the biggest increase in Asia outside Japan.
Bank Negara “gives the impression that the ‘normalization’ phase is about complete and from here, the tangibly slower global growth outlook argues for a slower pace of tightening, skipping some meetings,” said Sean Callow, a senior foreign- exchange strategist in Sydney at Westpac Banking Corp.
Indonesia has refrained from following neighbors from India to South Korea and Thailand in raising borrowing costs this year as President Susilo Bambang Yudhoyono targets annual growth of 6.6 percent. The reference rate is at the lowest level since its introduction in July 2005.
Inflation in Southeast Asia’s largest economy accelerated to a 16-month high of 6.44 percent in August, a government report showed today.
Fasting Month
Prices rose last month as the world’s most populous Muslim nation observed the fasting month of Ramadan and families began preparations for the Eid-ul-Fitr celebration. Higher electricity costs also added to inflation.
“Despite this, Bank Indonesia is unlikely to alter its policy rate for now,” said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore. “The central bank’s mantra is likely to remain the same, that food inflation is not to be fought with an interest-rate increase.”
Food prices rose 13.2 percent in August from a year earlier, after a 14.1 percent gain in July, the statistics bureau said. Food costs rose 0.5 percent in August from the month before, when it climbed 4.7 percent.
“The policy to increase food supply and distribution was a success,” Bank Indonesia Deputy Governor Hartadi Sarwono said in an e-mailed response to questions from Bloomberg. “We will see, and hope this trend will continue so we don’t need to raise the interest rate.”
The Indonesian rupiah’s gains may also help damp price pressures. The currency has climbed 4.3 percent against the dollar this year.
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
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