Economic Viewpoint - Malaysia Budget 2009

Economic Viewpoint



Malaysia Budget 2009 - Sustaining growth and winning support



· BNM's stationary rate stance appears to be the longest among the countries under comparison for this report despite having a real negative rate of 5.0% (OPR minus CPI) which is comparatively larger than most of the countries that have raised rates in the last eight months.

· The absence of tighter monetary stance amidst widening negative real rate gap would lead to further weakening of the currency, and in turn will exacerbate inflation by pushing up prices of imported goods. This would eventually affect businesses as well as consumer spending and ultimately growth.

· In view of the current downward pressure on the ringgit against the US dollar, a managed and measured rate hike would be more cost effective than direct market intervention by the central bank to stabilise and support the sliding ringgit.

· Protecting depositors against erosion of investment returns amidst sustained and high inflationary trend from June onwards would be a good enough reason to justify a rate hike.

· While the Government has been rather aggressive in reducing direct subsidy in the form of fuel price hike which affects the masses it is time to consider gradually reducing the support given to exporters and the banking sector in the form of cheap money.

· Given the preceding arguments, there is a case for the monetary authority to consider raising interest rates and the only issue now is the timing of the move. Nonetheless, we believe the possible hike would be gradual and measured which supports our view that it may do so in either two of the next three MPC meetings this year. Hence, we maintain our view that BNM may raise the Overnight Policy Rate (OPR) by up to 50 basis points to 4.00% by year end.


KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department