Malaysia economic recovery is firmly established

KUALA LUMPUR: Bank Negara Malaysia (BNM) has raised the Overnight Policy Rate (OPR) by 25 basis points to 2.25% at its monetary policy committee (MPC) meeting on Thursday, March 4 as the economic recovery is firmly established.

However, Indonesia's central bank kept its key interest rate on hold at a record low of 6.5% on Thursday and said it will keep it there if inflation is on target.

BNM said 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," BNM said.

BNM said 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," it said.

BNM said the OPR was reduced to historic lows in early 2009 as a key measure to avert a severe and fundamental economic downturn but "these conditions no longer prevail".

On inflation, the central bank expected prices would 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, it expected inflation to remain moderate in 2010.

As for the floor and ceiling rates of the corridor for the OPR, BNM said they were correspondingly raised to 2% and 2.50% respectively.

Meanwhile, Reuters reported that Indonesia's central bank kept its key interest rate on hold at a record low of 6.5 percent on Thursday and said it will keep it there if inflation is on target.

But the comments, which Bank Indonesia (BI) has repeated over the past three months, failed to alter expectations that rates will rise by the end of the third quarter.

"The main objective for keeping rates anchored is largely to support credit growth for the economy which is beginning to turn around," said Prakriti Sofat, regional economist at Barclays Capital in Singapore.

"Going forward we think the two factors that will be dominant would be the inflation outlook itself and the development of the credit growth."