March 22 (Bloomberg) -- Malaysia’s gross domestic product will expand at a slower pace this year as financial and economic restructuring in developed nations curb global growth, the central bank predicts.
The economy may expand 4 percent to 5 percent in 2012, Bank Negara Malaysia said in its annual report released in Kuala Lumpur yesterday. That is less than the Finance Ministry’s 5 percent-to-6 percent forecast in October, and a 5.1 percent pace in 2011. Inflation may slow to a range of 2.5 percent to 3 percent this year from 3.2 percent in 2011, it said.
“The Malaysian economy entered 2012 with increasing downside risks to growth amid softening inflationary pressures domestically,” the central bank said. “Monetary policy will continue to facilitate economic growth while managing risks to inflation and the build-up of financial imbalances.”
Malaysia has refrained from joining neighbors including Indonesia and the Philippines in cutting interest rates in recent months even as Europe’s debt crisis hurt Asian exports and economic growth. Some regional policy makers have held borrowing costs unchanged to assess the extent of a growth slowdown in China and rising oil prices as signs emerge of stabilization in the U.S. and Europe.
“At this stage 3 percent is already very accommodative,” Bank Negara Governor Zeti Akhtar Aziz told reporters in Kuala Lumpur yesterday, referring to the benchmark rate. “We’ll have to assess the situation. Having interest rates that are too low for too long will also result in other risks to the financial system and the economy.”
Thailand kept its key rate on hold yesterday after two reductions, judging that the economic outlook has improved. India may start cutting interest rates from April to bolster growth following a moderation in inflation, R. Gopalan, secretary of economic affairs, told Bloomberg UTV this week.
Malaysia’s ringgit rose 0.2 percent to 3.0713 per dollar at 10:10 a.m. in Kuala Lumpur today. The currency has climbed about 3 percent this year, the best performer after India’s rupee among 11 major Asian currencies tracked by Bloomberg.
Global investment fund flows may lead to increased short-term swings in the ringgit, the central bank said. The currency fell 3.5 percent last year after jumping 11.8 percent in 2010 as global funds were lured by the ringgit’s interest yield advantage amid a slowing global economy.
Malaysia’s central bank left interest rates unchanged at 3 percent for a fifth straight meeting earlier this month.
It is important not just to rely on interest rates to promote sustainable growth, and there are other “wide-ranging measures,” Zeti said. The current degree of accommodation in monetary policy is “sufficient,” she said.
Monetary policy this year will continue to operate in a “complex global environment” amid slower economic expansion, more volatile financial and commodity markets, with high liquidity in the international monetary system, according to the central bank.
Inclined to Hold
“The central bank is not comfortable with providing any kind of accommodation further on from here because domestic growth prospects are looking quite alright and there are still inflation risks,” said Rahul Bajoria, an economist at Barclays Capital in Singapore. “I don’t see any strong need for them to hike or cut this year but if we do continue to see the global backdrop improving, the bias of the central bank would be moving toward a more hawkish tone.”
Growth in the Malaysian economy this year will be supported by domestic demand, particularly the financial assistance offered by the government to help the poor and an increment in public sector wages, the central bank said.
In contrast, “the international financial reforms and the required structural adjustments in several major economies will not only contribute towards increased uncertainty in the international financial markets but are likely to have negative near-term implications on overall global economic growth,” it said in the report.
While there are recent improvements in the global outlook, including progress in addressing the European debt crisis and alleviating the risks of a disorderly default in Greece, the structural reforms that will take place in these countries are expected to result in near-term economic dislocation, Zeti said.
Inflation is expected to slow this year, reflecting the moderation in global commodity prices and a weaker growth outlook, the central bank said, even as it said there are “upside risks.” Domestic inflation would remain contained in the absence of significant adjustments to administered prices, it said.
While monetary conditions remain supportive of economic activity, “should the global economy enter a new phase of even weaker growth during the course of 2012 and adversely affect the outlook for the Malaysian economy, the Monetary Policy Committee at Bank Negara Malaysia has the flexibility to respond to adjust the degree of monetary accommodation,” the central bank said.
The central bank also said Malaysia is widening the use of yuan as a settlement currency as China has become the country’s biggest trading partner. With immediate effect, the yuan can be used to settle real-time interbank funds transfer and securities services, Bank Negara said in a statement yesterday.
The central bank plans to introduce dollar liberalization next as part of broader initiative to develop the Southeast Asian nation’s payments infrastructure for multinational settlements, Zeti said.
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