Malaysia Holds Rate to Support Growth as Price Pressures Loom

Malaysia held its benchmark interest rate for a 14th consecutive meeting to support economic growth as higher fuel prices threaten private consumption and add to inflationary pressures.

Bank Negara Malaysia maintained the overnight policy rate at 3 percent, the central bank said in a statement in Kuala Lumpur today. The decision was predicted by all 20 economists surveyed by Bloomberg News.

Prime Minister Najib Razak raised subsidized fuel prices this week and said he would delay some infrastructure projects to contain the budget deficit. Bank Negara cut its 2013 growth forecast last month, and Malaysia has been hurt by the recent market turmoil as the prospect of reduced U.S. monetary stimulus fueled a selloff in emerging-nation stocks and currencies.

“There will be an impact on growth as a result of the fiscal consolidation, as a result of the fuel price hike,” Ho Woei Chen, a Singapore-based economist at United Overseas Bank Ltd., said before today’s decision. “So the focus is on the growth outlook as well. Bank Negara will not be aggressive when it comes to tightening its monetary policy from here.”

The ringgit has lost more than 4 percent against the U.S. dollar this quarter, the worst performance among Asia’s 11 most-traded currencies after the Indonesian rupiah and the Indian rupee. It fell 0.8 percent to 3.3075 per dollar as of 5:50 p.m. local time.

The economy may expand 4.5 percent to 5 percent in 2013, from a previous prediction of as much as 6 percent, the central bank said Aug. 21.

Global Risks

“Economic growth is expected to be underpinned by the continued expansion in domestic activity,” the central bank said today. “Overall growth prospects, however, could be affected by risks in the global economy and international financial markets.”

The government raised the prices of the widely used RON 95 grade of gasoline and diesel, a move that will reduce state subsidies by about 3.3 billion ringgit ($1 billion) annually.

The subsidy cuts led economists from Credit Suisse Group AG to Malayan Banking Bhd. to raise inflation forecasts for this year and next. Consumer prices climbed 2 percent in July from a year earlier, the fastest gain in 16 months.

Inflation may accelerate to 2.1 percent this year, Credit Suisse analyst Santitarn Sathirathai wrote in a Sept. 4 report, compared with an earlier estimate of 1.9 percent. He raised his forecast for next year to 2.8 percent from 2.2 percent.

“Going forward, inflation is expected to increase in the remainder of the year and into 2014 resulting from domestic cost factors, including subsidy adjustments,” the central bank said in the statement. “In the Monetary Policy Committee’s assessment, there are increased uncertainties to the balance of risks surrounding the outlook for domestic growth and inflation.”

Bank Negara may raise borrowing costs by 25 basis points to 50 basis points in 2014, UOB’s Ho said.

Fitch Ratings cut Malaysia’s credit rating outlook to negative from stable in July, citing rising debt and lack of budgetary reform. The fiscal measures announced this week have not “significantly” altered its analysis and are too small to change the negative outlook, it said Sept. 3.

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