At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) to 2.25 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 2 percent and 2.50 percent respectively.

The recovery in the global economy is progressing amidst continued policy support and improvements in financial conditions. Economic activity in the advanced economies has improved although growth is expected to remain modest. Emerging economies, however, are recording a stronger recovery. In particular, regional economies expanded strongly in the fourth quarter of 2009 and the growth momentum is expected to be sustained.

In the domestic economy, the stronger growth performance in the fourth quarter of 2009 affirms that the economic recovery is firmly established. Going forward, growth is expected to strengthen further, supported by domestic demand and continued improvement in external demand, particularly from the regional economies.

Prices will gradually increase during the year, reflecting the prevailing economic conditions and taking into account possible adjustments in administered prices. While external factors, including rising global commodity and food prices, may exert some additional upward pressure on domestic prices, inflation is expected to remain moderate in 2010.

The OPR was reduced to historic lows in early 2009 as a key measure to avert a severe and fundamental economic downturn. These conditions no longer prevail. The domestic economy has since improved significantly and is now on a path of recovery. Given this improved economic outlook, the MPC decided to adjust the OPR towards normalising monetary conditions and preventing the risk of financial imbalances that could undermine the economic recovery process. At the new level of the OPR, the stance of monetary policy continues to remain accommodative and supportive of economic growth.

Published by Bank Negara Malaysia on 4 March 2010

KUALA LUMPUR: Bank Negara’s move to potentially raise interest rates in the near future should be viewed as a “normalisation” process, rather than an act of “tightening” monetary policy, said governor Tan Sri Dr Zeti Akhtar Aziz.

She emphasised the need for the markets to make a distinction between normalisation and tightening, pointing out that the significant reductions in interest rates implemented by the central bank last year were just an emergency position that the country had to take to avoid a fundamental recession.

“We need to look towards the normalisation of interest rates at some point. It should not be seen as tightening,” Zeti told reporters yesterday after a public lecture by Dr Abbas Mirakhor, the first holder of the International Centre for Education in Islamic Finance Chair.

Zeti voiced her concern that if interest rates were kept too low for too long, people would turn away from the conventional banking system in search of other instruments to enhance their returns on savings, and that could possibly involve them taking excessive risks without realising it.

“That could create a problem later on.

“We don’t want to wait for something to happen and then only take action,” she added, while pointing out that there was no sign of asset bubble forming or excessive leverage by consumers in the country yet.

“Borrowings of households are still at prudent levels,” she said.

On Tuesday, Bank Negara kept its overnight policy rate unchanged at a record low of 2%, but indicated that it could not keep the rate too low for a prolonged period as the local economy strengthened, otherwise, there would be a build-up of financial imbalances in the system.

The markets took that statement as a hint that the central bank would raise interest rates sooner than expected.

According to Zeti, the central bank could not tell when it would raise interest rates and by how much, but she said the monetary policy committee would continue to assess the prevailing economic trends to decide on the right quantum and timing to do so.

The next meeting of the monetary policy committee at Bank Negara is scheduled for early March.

“Anyhow, our stance is still to remain accommodative to support growth, especially in an environment where inflation is going to remain modest,” Zeti said.

The Government has targeted to hit a 5% gross domestic product growth this year, although the official forecast is for between 2% and 3% growth this year.