Malaysia Holds Rate; Policy Makers Study Price, Growth Risks

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Malaysia’s central bank left its key interest rate unchanged for a fifth straight meeting, refraining from adding stimulus as policy makers assess the impact of a new tax on price pressures and consumption.

Bank Negara Malaysia kept the overnight policy rate at 3.25 percent, it said in a statement in Kuala Lumpur Thursday. The decision was predicted by 21 of 22 economists surveyed by Bloomberg News, with one forecasting a 25-basis point cut.

With above-5 percent growth and inflation near the slowest since 2009, Bank Negara Malaysia has held back from joining dozens of global counterparts in easing monetary policy this year. Central bank Governor Zeti Akhtar Aziz signaled last month she sees no need for a rate cut in the near future, barring the threat of a “fundamental” downturn in the economy.

“Growth is not slowing significantly enough in the first quarter to justify a rate cut,” Hak Bin Chua, an economist at Bank of America Merrill Lynch in Singapore, said before the decision. “Demand-side price pressures appear quite tame.”

Malaysia’s two-year interest-rate swaps suggest traders weren’t expecting a rate cut Thursday. The swaps were at 3.635 percent as of 5:56 p.m. local time, almost 40 basis points more than the central bank’s benchmark rate.

The ringgit weakened Thursday, extending its drop this year against the U.S. dollar to about 2.7 percent, according to data compiled by Bloomberg. The currency is undervalued and doesn’t reflect the country’s fundamentals, Zeti said last month, even as she pointed out that the ringgit’s level hasn’t been a factor in monetary policy decisions.

Growth Projection

Prime Minister Najib Razak said in January growth will be 4.5 percent to 5.5 percent this year, down from an earlier projection of as much as 6 percent. The government lowered its forecast as it cut expenditure amid lower expected revenue from oil. Zeti said last month the midpoint could be “slightly lower” at about 4.8 percent.

Latest indicators suggest domestic demand continued to support growth in the first quarter, the central bank said Thursday. It will release gross domestic product data for the three months through March next week.

“The prospects are for the Malaysian economy to remain on a steady growth path, with domestic demand remaining as the key driver of growth,” it said. “Although private consumption is expected to moderate as households adjust to the introduction of the Goods and Services Tax, consumption expenditure will be supported by the steady rise in incomes and employment.”

GST Impact

Malaysia implemented the GST of 6 percent in April. The impact of the levy will be seen in inflation data to be released later this month. Consumer prices rose 0.9 percent in March from a year earlier.

“Inflation will likely tick up after the GST’s introduction in April,” Chua said. “But the impact may be quite limited, because of the broad exemptions and government efforts to keep opportunistic price increases in check.”

The inflation rate may be at the lower end of a 2 percent to 3 percent range in 2015, and it isn’t a concern at this point in time, Zeti said April 23. While headline inflation is expected to trend higher for the rest of the year, underlying price gains are expected to remain contained, the central bank said Thursday.

At the current interest rate level, Malaysia’s monetary policy stance remains accommodative and supportive of economic activity, it said.

“Our base case at this juncture is an extended pause through 2015 with growth, inflation and financial stability risks finely balanced,” Weiwen Ng and Glenn Maguire, economists at Australia & New Zealand Banking Group Ltd., wrote in a note after the decision. “The risk to our policy view is clearly tilted towards a rate cut later this year, should the focus for monetary policy skew towards supporting growth.”

Bank Negara raised rates in July after growth quickened and as it sought to curb the risk of financial imbalances. Bond investors, who have been pricing in another increase, have pared previous bets for higher rates in recent months.

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