Malaysia to adjust monetary policy if growth picks up

Kuala Lumpur, Nov 21 | Updated: Nov 22 2005, 05:30am hrs
Malaysia will adjust its monetary policy if economic growth picks up and inflation stays high, the central bank said on Monday, which economists said suggested interest rates could rise as soon as this month. Bond prices fell after the remarks by central bank governor Zeti Akhtar Aziz, who pointed to third-quarter gross domestic product figures due on Nov. 30 as likely to provide a clearer idea about how the economy is performing.

Trade-dependent Malaysia has been loathe to raise interest rates despite a pick-up in inflation, for fear of hurting consumer demand and dampening growth. But oil-induced price pressures, negative real returns on interest rates and a widening rate gap with the United States are increasing the pressure on Bank Negara, the central bank, to tighten policy.

In the second quarter we saw growth slow down while inflationary pressures rose, Zeti told reporters on the sidelines of an investment conference. In our assessment, the risk of slower growth going forward and higher inflation at that time was about in balance, she added. We will have a clearer picture when we get the figures for the third-quarter performance of what the underlying growth potential and outlook will be for the economy.

Going forward, if the risk of this diminishes while the rate of inflation continues to remain high, then there would be a monetary policy response, Zeti said. She did not elaborate. The central bank is to release third-quarter GDP and a quarterly monetary policy statement on Nov. 30. Malaysias benchmark overnight policy rate has been at 2.70 percent since it was introduced in 2004.

During that time, Thailand, Indonesia, Taiwan, South Korea, Philippines, China, Hong Kong and India have all increased interest rates, and Singapore, which uses its currency as its policy tool, has had a tightening policy.

Economists, who expect annual economic growth to pick up in the third quarter compared with the second quarter, said Zetis remarks suggested that the central bank would soon tighten its monetary policy.

Comments from Bank Negara Governor Zeti today seem to be a signal to the market that monetary policy could be tightened as soon as this month when Q3 GDP figures are released, said Sani Hamid, an analyst at Singapore-based Forecast Pte. Ltd.. A move to tighten monetary policy has never been in doubt with the question only surrounding when it would happen.