Malaysia Holds Rate to Support Consumption as Inflation Quickens

Bank Negara Malaysia kept its benchmark interest rate unchanged for a 17th straight meeting to support economic growth and domestic consumption, even as inflation quickened to the fastest in more than two years.

The central bank held the overnight policy rate at 3 percent, it said in a statement in Kuala Lumpur today. All 23 economists surveyed by Bloomberg News predicted the decision.

Prime Minister Najib Razak has raised subsidized fuel prices and electricity tariffs in recent months, adding pressure on policy makers to contain inflation that is eroding purchasing power. Higher borrowing costs may threaten Malaysia’s growth prospects as central bankers around the world remain on alert just weeks after a market selloff in emerging economies raised fresh concerns the global expansion could falter.

“Bank Negara will keep policy rates unchanged at 3 percent in the first half while it continues to assess the risks to growth and inflation,” Lee Heng Guie, an economist at CIMB Group Holdings Bhd. in Kuala Lumpur, said before the decision. “Bank Negara indicated its focus is on price stability, they will still be watching on the inflation risks. At the same time, they would want to make sure that growth still remains intact.”

Consumer prices rose 3.4 percent in January from a year earlier, the fastest pace since October 2011. Malaysian interest-rate swaps are starting to price in two increases in the benchmark rate in the next 12 months, with one-year ringgit contracts rising 22 basis points to 3.46 percent since Oct. 25, according to data compiled by Bloomberg.

Rates Outlook

The ringgit is Asia’s second-best performing currency over the past month, bolstered by the outlook for higher rates, and improving trade and current-account surpluses. It climbed 0.3 percent against the dollar as of 5:50 p.m. in Kuala Lumpur.

“Going forward, inflation is expected to be affected by higher domestic costs,” the central bank said today. “The subdued external price pressures and moderate domestic demand conditions will, to some extent, contain the impact of these cost factors on the underlying inflation.”

Southeast Asia’s third-biggest economy is projected by the government to expand 5 percent to 5.5 percent this year, after growth of 4.7 percent in 2013. Rebounding exports are countering a spending squeeze, and economists surveyed by Bloomberg predict a report tomorrow will show overseas shipments rose for a seventh month in January.

Exports will continue to benefit from the recovery in advanced economies, while domestic demand is expected to moderate, the central bank said. It will also continue to monitor for signs of “destabilizing risks of financial imbalances,” it said.

“The Monetary Policy Committee remains focused on ensuring that the monetary policy stance is consistent with price stability and continues to foster sustainable economic growth,” it said.

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