Malaysia Holds Rate as Central Bank Targets Household Debt

Malaysia kept its benchmark interest rate unchanged for a 13th straight meeting even as economic growth slows, as the central bank guards against risks stemming from rising household debt.

Bank Negara Malaysia maintained the benchmark overnight policy rate at 3 percent, the central bank said in a statement in Kuala Lumpur today. The decision was predicted by all 19 economists surveyed by Bloomberg News.

“For the Malaysian economy, domestic demand has continued to support growth amid the continued moderation in external demand,” the central bank said. “The sustained weakness in the external sector may, however, affect the overall growth momentum.”

The central bank is balancing a faltering global recovery that cooled Malaysia’s growth to less than 5 percent for the first time in seven quarters against resilient domestic spending. Household indebtedness levels have been increasing at a “strong” pace and averaged 12 percent per annum in the past five years, Bank Negara said last week as it imposed limits for mortgages and personal loans.

“Any strain in the external environment including the slowdown in the growth of China could potentially be the drag in terms of external trade going forward,” Patricia Oh Swee Ling, an economist at AMMB Holdings Bhd., said after the decision. “That said, domestic demand has been quite resilient, that had provided growth the support during the first five months of this year.”

Indonesian Contrast

Malaysia’s decision contrasts with that of Indonesia, which raised borrowing costs for the second straight meeting today to cool inflation pressures after the government raised fuel prices.

While Indonesia’s economy grew 6.02 percent in the first quarter from a year earlier, Malaysia’s gross domestic product rose 4.1 percent in the three months through March from a year earlier, after a revised 6.5 percent gain in the previous quarter. Malaysia’s inflation of 1.8 percent in May compares with Indonesia’s 5.9 percent in June.

“While inflation is expected to rise in the second half of the year due to domestic supply and cost factors, it is projected to remain modest,” Bank Negara said. “Pressures from global commodity prices are also likely to be contained given the moderate global growth prospects.”

The central bank imposed a maximum tenure for mortgages and personal loans last week, joining neighbor Singapore in implementing measures to limit risks stemming from rising household debt. Banks and other credit providers can now provide mortgage financing of not more than 35 years from a previous tenure of as long as 45 years, it said.

While the global economy continues to experience slow growth and financial market volatility has increased “substantially” as markets reassessed the direction of policy, Malaysia’s private consumption is expected to remain steady, helped by income growth and stable labor market conditions, the bank said.

Malaysia’s industrial production rose 3.4 percent in May from a year earlier, a report showed earlier today.

Before it's here, it's on the Bloomberg Terminal.