Malaysia: Stimulus Pullback?

Bloomberg tweeted this news report today.

Let us read this tweet.

"Malaysia may be the next Asian country to pull back monetary stimulus as its recovery strengthens, moving to raise borrowing costs or reduce excess cash in the economy ahead of neighboring Indonesia.

Eighteen out of 29 economists surveyed by Bloomberg News expect Bank Negara Malaysia to raise its benchmark interest rate to 2.25 per cent from 2 per cent or ask lenders to set aside more money as reserves at its March 4 meeting. None of the 22 economists surveyed expect Bank Indonesia to increase its reference rate from a record-low 6.5 per cent tomorrow.

Asia is leading a global recovery from the worst slowdown since World War II, prompting the region’s central banks to start removing some emergency steps taken to counter the slump. Malaysia’s economy expanded 4.5 per cent last quarter, rebounding from nine months of contraction, while Indonesia, which has avoided a recession, is trying to boost lending.

“Indonesia’s economy has been doing very well but it has not surprised on the upside to the extent that it has in Malaysia,” said Kevin Grice, an economist at Capital Economics Ltd in London. “Central banks don’t want to surprise, and there have been comments by policy makers in Indonesia that rates are appropriate compared to Malaysia, where the governor has been hawkish.”

Malaysia’s one-year interest-rate swap reached a one-year high of 2.675 per cent on Feb 24 after a report showed the nation exited its recession last quarter. The three-month rate due in one year stood at 3.42 per cent, suggesting the market has priced in about 1.42 percentage points’ increase in the policy rate in a year’s time, according to Bloomberg data.

Exports Revival

Prime Minister Datuk Seri Najib Razak expects Malaysia’s US$195 billion economy to expand 6 per cent in 2010, faster than the 2 per cent- to-3 per cent pace the government forecast in October, a newspaper reported this week. His trade minister said yesterday exports may climb this year at twice the pace predicted earlier as the global recovery revives overseas sales of Sime Darby Bhd’s palm oil and Intel Corp’s computer chips.

Policy makers in Australia, China, India and Vietnam have started tightening monetary policy to stave off inflation and asset bubbles. Australia’s central bank yesterday resumed raising interest rates after a one-meeting pause amid a booming jobs market, rising home prices and a rebound in confidence.

‘Hawkish’ Comments

Malaysia’s central bank Governor Tan Sri Dr Zeti Akhtar Aziz has been making “hawkish comments” since the last interest-rate meeting in January, economists including HSBC Holdings Plc’s Robert Prior-Wandesforde said. Bank Negara has kept the benchmark overnight policy rate at a record-low 2 per cent for seven straight meetings.

The central bank lowered rates under emergency conditions and the economy is no longer in such an extraordinary situation, Market News International reported Zeti as saying in Frankfurt on March 1. Any interest-rate adjustment would be “a measured one,” she was cited as saying.

Thirteen of the 29 economists surveyed expect the central bank to raise the benchmark rate. Still, Bank Negara may prefer to raise the reserve requirement for banks rather than increase its overnight policy rate, according to at least six analysts, including economists at Capital Economics and Royal Bank of Scotland Group Plc. A 0.5 percentage-point increase may be announced tomorrow to help drain funds from the financial system, they predicted.

Indonesian Inflation

The reserve ratio, which determines the amount of funds lenders must hold as zero-interest-bearing reserves at the central bank, was cut to 1 per cent in March 2009, a quarter of the November 2008 level.

In Indonesia, where inflation has accelerated to the fastest pace in nine months, economists are unanimous that the policy makers will judge it too soon to raise interest rates. The consumer price index rose 3.81 percent in February from a year earlier.

Consumer price gains will remain within the central bank’s target range of 4 per cent to 6 per cent, and Bank Indonesia can wait until the third quarter before raising rates, said Wellian Wiranto, an economist at HSBC.

Bank Indonesia, which forecasts the nation’s 121 commercial lenders will accelerate credit growth to as much as 20 per cent this year, may wait until there are more signs of banks extending loans before raising interest rates, economists say.

“Indonesia’s central bank is now encouraging commercial banks to reduce their lending rate so if they raise rates, it’s contrary” to that goal, said Gundy Cahyadi, an economist at IDEAglobal in Singapore. He expects a rate increase at the beginning of the third quarter.

Indonesia’s decision is due after 11 am in Jakarta tomorrow. Malaysia will release its decision at 6 pm.