Possibility of a rate cut in the first quarter of 2012

(Published in the Star Biz 15th November 2011 issue: page 1)

By FINTAN NG 

PETALING JAYA: A cut in the benchmark interest rate may come as early as next January if domestic economic conditions deteriorate in the face of global economic uncertainties in the coming months.

CIMB Investment Bank Bhd economic research head Lee Heng Guie said in a report that an early rate cut in the first quarter of 2012 was still a possibility.

The monetary policy committee (MPC) meets twice in the first quarter on Jan 31 and March 9. The last time Bank Negara cut the overnight policy rate (OPR) was in early 2009 as part of measures to stimulate the economy in the wake of the global financial crisis.

“The tone of the policy statement suggests that growth is more of a worry than inflation, signalling the central bank's readiness to reverse its monetary course if domestic conditions deteriorate,” Lee said, revising the OPR for end-2012 to 2.50%-2.75% from 3%.

The central bank last Friday kept the OPR unchanged at 3% following the last MPC meeting of the year in a move not entirely unexpected by the market as the global outlook continued to weaken and international financial market conditions remained highly uncertain and volatile.

The dim prospects have prompted Bank Indonesia to cut benchmark rates by a larger-than-expected 50 basis points to 6% last Thursday while the Bank of Thailand may cut rates at the end of the month to support the flood-hit economy.

While economists expect a rate cut in the first half of next year, Citigroup Inc's Singapore-based senior economist Kit Wei Zheng described the absence of explicit guidance on the OPR outlook as reflecting heightened uncertainties in the coming months.

He expects the OPR to be maintained in January contingent upon the central bank's baseline scenario of stable domestic demand materialising. “Conversely, any indications in the fourth quarter that domestic demand and/or financial conditions are deteriorating will open the door on 25 basis points to 50 basis points (cuts in the OPR) in the first quarter, especially since hurdles from inflation risks have receded,” Kit said in a Nov 11 report.

Third-quarter gross domestic product, which would be released this Friday would show an improvement, as Bank Negara indicated in the MPC statement while inflation, despite an uptick to 3.4% in September due to a rise in the prices of food and non-alcoholic beverages as well as transport, would continue to stabilise for the rest of the year and moderate in 2012.

Affin Investment Bank Bhd economist Alan Tan said the cautious wording of the latest MPC statement on the economic outlook signalled possible cuts of up to 50 basis points in two meetings.

He added that this would be consistent with a dual mandate of ensuring a balance between inflation and economic growth, where the country's monetary policy would be shifting back to the slowdown in economic growth rather than focusing on inflation pressure.

In contrast, Hong Leong Investment Bank Bhd research head Low Yee Huap expects the OPR to hold steady until the end of next year as the central bank leaned towards a growth agenda given the recent external developments and moderating inflation trends.

“Bank Negara is going to buy time for the Economic Transformation Programme to be implemented and its impact to work through the system while staying vigilant on inflation,” he said.

A Bloomberg report noted that the ringgit advanced the most since Nov 4 to close at 3.135 versus the greenback following last Friday's policy statement and after weakening 1.9% this month as investors pulled out of emerging market assets due to continued uncertainty in the eurozone.