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NEWS UPDATES Asean Affairs         6  July 2011

Global events make Malaysian interest hike problematic

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Europe’s debt crisis and signs of a slowdown in global growth are complicating Malaysia’s decision on interest rates as a pickup in inflation coincides with dimming prospects for export gains.

Bank Negara Malaysia will raise its benchmark overnight policy rate to 3.25 percent from 3 percent at its fourth meeting of the year, according to 10 of 15 economists surveyed by Bloomberg News. The rest expect no change.

The July 6 discussion may echo debates across the Asia-Pacific region, which has led global growth and where policy makers have enacted the steepest increases in borrowing costs. While India, South Korea and Thailand opted to raise their key rates last month, China and the Philippines asked lenders to set aside more cash as reserves instead.

European finance ministers have authorized an 8.7 billion- euro ($12.6 billion) loan payout to Greece by mid-July, pulling the country back from the brink of default and gaining time to hammer out a formula for ending the debt crisis. Economic growth in the U.S. slowed to a 1.9 percent annual pace in the first quarter from 3.1 percent in the previous three months and the unemployment rate has climbed back above 9 percent.

Malaysia’s inflation accelerated to the fastest pace in more than two years in May as consumer prices rose 3.3 percent. Bank Negara has raised the benchmark rate by a percentage point since the beginning of March 2010 to curb inflation, most recently a quarter-point increase at the last meeting in May.

Governor Zeti Akhtar Aziz said last month central banks around the world should be wary of an “over adjustment” in their response to faster inflation. Malaysia has raised rates four times and doesn’t want to overreact, she said in an interview.


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