KUALA LUMPUR: Central banks of several developed nations initiated interest rate cuts earlier this month to spur their flagging economies. Will Bank Negara Malaysia (BNM) budge from its “no-change” stance this Friday in tandem with its global peers as concerns of slowing economic growth overpower the threat of inflation?

Unlikely, according to economists. Bank Islam Malaysia Bhd senior economist Azrul Azwar said Malaysian policymakers might decide to wait for a clearer picture of the nation’s economic landscape upon the release of the third quarter (3Q) gross domestic product (GDP) results.

“They want to assess all the data,” Azrul told The Edge Financial Daily over telephone yesterday.

He added that should the 3Q numbers turned out to be worse than expected, chances of a rate cut at the year’s final monetary policy meeting next month “is great”.

BNM kept the overnight policy rate (OPR) unchanged at 3.5% for the 19th consecutive time in August. The central bank’s next policy update will be on this Friday.

Weaker economic growth concerns have overshadowed the threat of soaring inflation in Malaysia as declining crude oil prices tame the ferocity of rising consumer prices, Second Finance Minister Tan Sri Nor Mohamed Yakcop said earlier this month.

The minister cautioned that Malaysia, like other economies, was now concerned about a possible recession in the United States and Europe amid a global credit crunch. The weakening of these developed economies would likely translate to less export revenue for developing nations.

Despite the global financial crisis, the Malaysian financial sector is still deemed liquid, which means, local businesses and consumers still have adequate access to bank borrowings to spur domestic demand, a pillar of the national economy.

At 3.5%, Malaysia’s current OPR is already deemed growth-inducing, hence, no urgent need to cut interest rates to stimulate economic expansion for the time being.

"ECM Libra Investment Bank Bhd economist Dr Lai Mun Chow said 3.5% was deemed the most appropriate level to ensure price stability and sustain economic growth for Malaysia at the moment.

“After all, it is still lower than the neutral level, which is at about 4%,” Lai wrote in an emailed reply.

The economist expects BNM to maintain interest rates at 3.5% this Friday. But would doing so be detrimental to Malaysia since several developed nations have already initiated cuts?

Lai contended that most of the central banks which had aggressively cut interest rates recently were those which had significantly tightened their monetary policy since early this year. “What they are doing now is just to normalise it, as the risk to inflation has clearly shifted to growth since July this year.

“In the case of Malaysia, BNM has not budged on the OPR since April 2006. This suggests that BNM’s decision making has been quite independent of global interest rate movement over the past few years,” Lai added.

Malaysia’s GDP growth for the rest of the year will be a crucial indicator of its interest rate policy. Should real GDP growth in 3Q and 4Q fall significantly below 4.7%, the central bank may slash the OPR by 25 basis points to 3.25%, according to Lai.

At the same time, inflation is still deemed high by historical standards despite declining crude oil prices. This, essentially, means BNM may opt not to cut interest rates too soon or drastically to ensure that local consumer prices were stable.

“BNM may want to wait for other central banks in the region to further cut their benchmark interest rates before it follows suit, lest there could be more sell-down in the ringgit,” Lai said.

The threat of a global recession amid a financial liquidity crisis had prompted several central banks to lower interest rates earlier this month. Among them, the US had cut lending rates by half a percentage point to 1.5%.

Across the Atlantic, the European Central Bank (ECB) and the Bank of England also slashed interest rates by half of a point to 3.75% and 4.5% respectively. The ECB’s move was its first in five years.

At the same time, China announced that its benchmark one-year lending rate was lowered by 0.27 percentage point to 7.2%