Malaysia May Keep Policy Rate Unchanged

http://www.bloomberg.com/apps/news?pid=10000080&sid=a1mUrCkvNQC8&refer=asia

Malaysia May Keep Policy Rate Unchanged as Ringgit Strengthens
Jan. 20 (Bloomberg) -- Malaysia's central bank will probably keep its key
interest rate unchanged as a rising currency holds inflation steady and
capital outflows ease.

Bank Negara Malaysia Governor Zeti Akhtar Aziz and her fellow policy makers
will maintain the overnight policy rate at 3 percent at a meeting in Kuala
Lumpur today, waiting until next month's meeting to raise the rate to 3.25
percent, according to the median forecasts in a Bloomberg News survey.

The ringgit has gained 0.8 percent since Governor Zeti raised interest
rates in November for the first time since the Asian financial crisis of
1997-1998. That's helped cap inflation by making imports cheaper and may
give the central bank room to pause before it raises borrowing costs any
further.

``Bank Negara has a clear tightening bias but with eight rate setting
meetings this year it can probably afford to wait another month before
hiking again,'' said Julian Jessop, an economist at Capital Economics in
London. ``This will allow it to gauge the impact of November's rate
increase and get a better sense of currency trends in 2006.''

The central bank on Nov. 30 raised its key policy rate to 3 percent from
2.7 percent, citing the impact of higher fuel prices on inflation in
Southeast Asia's third largest economy.

The November rate hike was sufficient to curb inflation, Mustapa Mohamed, a
minister in Prime Minister Abdullah Ahmad Badawi's department in charge of
economy, said last month.

The Nov. 30 move ``is not indicative of any plans for further increases in
the interest rates,'' Zeti said in a Dec. 3 speech to the Association of
Merchant Banks in Kuala Lumpur.

Inflation

Malaysia's inflation rate increased to 3 percent last year, the highest
since 1998, as the government raised retail gasoline prices amid rising oil
prices, striving to cut fuel subsidies. The consumer price index rose 3.5
percent from a year earlier in December, matching the gain of the previous
month.

``Bank Negara is not likely to deal a consecutive rate hike after
December's tightening,'' said Rebecca Lee, an economist at United Overseas
Bank Ltd. in Singapore. ``It will likely pause to assess the inflation
situation, which looks to be topping out,'' while the central bank and
government ``now also look more ready to allow the ringgit to appreciate.''
Of the 17 economists surveyed by Bloomberg News this week, 14 expect the
central bank to keep its policy rate unchanged today. All but three of 15
economists expect a rate increase at the Feb. 17 monetary policy meeting.

Foreign Reserves

``We think Bank Negara Malaysia has the luxury to wait until next month as
the exchange rate has strengthened in recent weeks, which suggests that the
drain on foreign exchange reserves has probably eased following a sharp
decline in the fourth quarter,'' said Arthur Woo, an economist at Merrill
Lynch, in a Jan. 17 report.

The decline in Malaysia's foreign reserves eased to $2.6 billion in
December, after falling $4 billion the month before, according to central
bank data.

Still, the pause in rate hikes may be temporary, as the central bank is
likely to increase rates further this year to curb rising inflation and
narrow the gap between local and overseas interest rates which has caused
funds to seek higher returns outside Malaysia, economists say.

The overnight policy rate may rise to 3.5 percent as early as May,
according to the median forecast of 14 economists in the Bloomberg survey.

Malaysia's inflation rate may rise to 3.5 percent this year, as the
government raises fuel prices and utility companies seek official approval
to raise charges, the Malaysian Institute of Economic Research said
yesterday.

Global Rates

Additional rate increases may have to start as early as today, said David
Cohen, head of Asian economic forecasting at Action Economics in Singapore.
``Though the ringgit has firmed along with other regional currencies in the
face of dollar weakness in early January, the central bank still might go
ahead with a rate hike after having fallen behind the pick-up in inflation
and the general uptrend in global rates,'' Cohen said.

The U.S. Federal Reserve has raised its benchmark interest rate 13 times
since June 2004 to control inflation. Until November, Bank Negara's
overnight policy rate had been unchanged at 2.7 percent since it was
introduced in April 2004 as a benchmark for the country's 10 domestic
lenders and 13 foreign- owned banks. Malaysia last raised rates in February
1998.

The following tables give forecasts for Malaysia's overnight policy rate
from a Bloomberg survey conducted from Jan. 11 to Jan. 19.



-------------------------------------------------------------
Forecaster Jan 20 Feb 17 Apr 25 May 22
2006 2006 2006 2006
-------------------------------------------------------------
Median 3.00% 3.25% 3.25% 3.50%
Average 3.05% 3.20% 3.25% 3.41%
High 3.30% 3.30% 3.50% 3.75%
Low 3.00% 3.00% 3.00% 3.00%
Number of Forecasts 17 15 14 14
-------------------------------------------------------------
Action Economics 3.30% 3.30% 3.30% 3.30%
Alliance Merchant Bank 3.00% 3.25% 3.25% 3.50%
Capital Economics 3.00% 3.25% 3.25% 3.50%
Citigroup 3.00% n/a n/a n/a
DBS Bank 3.25% 3.25% 3.50%* 3.50*
ECM Libra Securities 3.00% 3.00% 3.00% 3.00%
Forecast Ltd 3.00% 3.25% 3.25% 3.50%
IDEAglobal 3.00% 3.25% 3.25% 3.50%
JP Morgan 3.00% 3.25% 3.25% 3.50%
Lehman Brothers 3.00% n/a n/a n/a
Merrill Lynch 3.00% 3.25% n/a n/a
OSK Securities 3.00% 3.25% 3.25% 3.50%
RHB Research Institute 3.25% 3.25% 3.50% 3.50%
Standard Chartered 3.00% 3.25% 3.50% 3.75%
Thomson IFR 3.00% 3.00% 3.00% 3.30%
UOB Group 3.00% 3.25% 3.25% 3.25%
UOB Kay Hian Research 3.00% 3.00% 3.25% 3.25%
-------------------------------------------------------------

-------------------------------------------------------------
Jul 28 Aug 25 Sep 26 Nov 24
2006 2006 2006 2006
-------------------------------------------------------------
Median 3.50% 3.50% 3.50% 3.50%
Average 3.45% 3.53% 3.55% 3.57%
High 4.00% 4.00% 4.00% 4.00%
Low 3.00% 3.00% 3.00% 3.00%
Number of Forecasts 14 14 14 14
-------------------------------------------------------------
Action Economics 3.30% 3.60% 3.60% 3.60%
Alliance Merchant Bank 3.50% 3.75% 3.75% 3.75%
Capital Economics 3.50% 3.50% 3.50% 3.50%
DBS Bank 3.75%* 3.75% 3.75% 3.75%
ECM Libra Securities 3.00% 3.00% 3.00% 3.00%
Forecast Ltd 3.50% 3.50% 3.50% 3.50%
IDEAglobal 3.50% 3.50% 3.50% 3.50%
JP Morgan 3.50% 3.50% 3.50% 3.50%
OSK Securities 3.50% 3.50% 3.50% 3.50%
RHB Research Institute 3.75% 3.75% 4.00% 4.00%
Standard Chartered 4.00% 4.00% 4.00% 4.00%
Thomson IFR 3.30% 3.60% 3.60% 3.60%
UOB Group 3.25% 3.25% 3.25% 3.25%
UOB Kay Hian Research 3.25% 3.25% 3.25% 3.50%
-------------------------------------------------------------
Note: *DBS forecasts are for first, second, third and fourth
quarters only. The economist didn't specify at which policy
meeting within the quarter the changes will take place.

To contact the reporter on this story:
Stephanie Phang in Kuala Lumpur at at sphang@xxxxxxxxxxxxx
Last Updated: January 19, 2006 11:01 EST

-pluto
.

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