Economists Split as Malaysia Readies for Interest-Rate Decision

By Stephanie Phang and Michael Munoz

April 29 (Bloomberg) -- Economists are split on whether Malaysia will lower its benchmark interest rate as the central bank balances a collapse in exports and the threat from swine flu against government stimulus measures.

A reduction is expected by 11 of 21 economists surveyed by Bloomberg News, with eight forecasting a quarter-point cut to 1.75 percent. Three expect a half-percentage-point reduction. Ten predict no change. The decision is due at 6 p.m.

Inflation at an 11-month low and the risk that swine flu will prolong the global recession may encourage the central bank to add to 1.5 percentage points of reductions since late November. Prime Minister Najib Razak, who’s lost two of three regional elections this month, has unveiled two stimulus plans and allowed more foreign ownership of banks and services companies to spur growth.

“While stimulus measures have been put in place, the impact has yet to take effect,” said Patricia Oh, an economist at TA Securities Holdings Bhd. in Kuala Lumpur. “With the moderating trend in inflation, there is ample room for monetary easing.”

Swine flu, which has infected people in Mexico, the U.S., the U.K., Canada and Spain, may delay a global recovery, adding pressure for rate cuts, said Alvin Liew, an economist at Standard Chartered Plc in Singapore.

Bank Negara Malaysia Governor Zeti Akhtar Aziz said last month that gross domestic product may have contracted in the first quarter and predicted a revival in the second half on stimulus measures and reduced borrowing costs.

Shrinking Economy

“We strongly suspect that Bank Negara will be surprised by the weakness of GDP growth in the first quarter,” said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore who expects a quarter-point cut today. The economy may have contracted by at least 3 percent in the three months through March from a year earlier and more than 5 percent this quarter, he said.

Interest-rate swaps suggest the central bank will refrain from cutting because the economy shows signs of recovery. Zeti said this week that Bank Negara may have “done most of what we need to do” and reiterated that rate cuts had been “frontloaded.”

Three-year swap rates have climbed 0.3 percentage point since touching a decade low on March 4 and one-year swap rates rose to 2 percent on April 27, matching the central bank’s overnight rate.

Smaller declines in exports and industrial production in February “may give Bank Negara greater confidence to pause,” Citigroup Inc.’s Singapore-based economists Kit Wei Zheng and Leon Hiew said in a April 24 note. “The hurdle for further rate cuts appears high.”

Southeast Asia’s third-largest economy grew 0.1 percent in the fourth quarter from a year earlier, the least in seven years, as exports of Intel Corp. computer chips and IOI Corp. palm oil tumbled. Inflation cooled to 3.5 percent in March.

Malaysia Overnight Policy Rate Estimates
========================================================
Observation Period         April     End     End     End
                             29      2Q      3Q    2009
========================================================
Median                     1.75%   1.50%   1.50%   1.50%
% forecasts at Median      38.1%    8.0%    7.0%    7.0%
High                       2.00%   2.00%   2.00%   2.00%
Low                        1.50%   1.25%   1.25%   1.25%
Number of Estimates           21      12      12      12
========================================================
Action Economics           2.00%   2.00%   2.00%   2.00%
AmResearch                 2.00%   1.50%   1.50%   1.50%
Bank Islam Malaysia        1.75%   1.50%   1.50%   1.50%
Barclays Capital           2.00%      --      --      --
Capital Economics Ltd.     1.75%      --      --      --
CIMB Investment Bank       2.00%      --      --      --
Credit Suisse              1.75%      --      --      --
DBS Group                  1.50%   1.50%   1.50%   1.50%
HSBC                       1.75%   1.25%   1.25%   1.25%
IDEAglobal                 2.00%      --      --      --
ING Groep NV               2.00%      --      --      --
JP Morgan Chase            2.00%   2.00%   2.00%   2.00%
Macquarie Securities       2.00%      --      --      --
Maybank Investment Bank    2.00%   2.00%   2.00%   2.00%
Moody’s Economy.com        1.75%   1.50%   1.50%   1.50%
Nomura Singapore           1.75%      --      --      --
OCBC Bank                  1.75%   1.50%   1.50%   1.50%
Reuters IFR                2.00%      --      --      --
Standard Chartered         1.50%   1.50%   1.50%   1.50%
TA Enterprise Berhad       1.50%   1.50%   1.25%   1.25%
Westpac Banking            1.75%   1.50%   1.50%   1.50%
========================================================

To contact the reporter on this story: Stephanie Phang in Singapore at sphang@bloomberg.net