Malaysia Says Policy May Need Adjustment After Rate Kept Steady

Malaysia may need to adjust the degree of monetary policy accommodation to avoid a broader build-up in financial and economic imbalances, the central bank said after keeping interest rates unchanged for an 18th straight meeting.

The central bank held the overnight policy rate at 3 percent, it said in a statement in Kuala Lumpur today. The decision was predicted by 18 of 20 economists surveyed by Bloomberg News, while two forecast a 25 basis-point increase. Ringgit forwards rose after the announcement, reflecting traders’ expectations the currency will strengthen.

Malaysia joins the Philippines in signaling a readiness to contain threats to financial stability, with Bangko Sentral ng Pilipinas ordering lenders today to set aside more money as reserves to curb liquidity and price pressures. A prolonged period of accommodation could encourage investors to misprice risk and misallocate resources, Malaysian central bank Governor Zeti Akhtar Aziz said last month.

“Basically they are telling you that ‘I’m sorry, not this time but the next time,’” said Irvin Seah, an economist at DBS Group Holdings Ltd. in Singapore, referring to Malaysia. “As long as real interest rates remain in negative level, it will continue to encourage speculations in activity in the asset markets. And that would further exacerbate the financial imbalances problem.”

Malaysian interest-rate swaps are pricing in a 50 basis-point increase in borrowing costs in the next year, compared with 25 basis points six months ago, data compiled by Bloomberg show. The ringgit gained 0.4 percent to close at 3.2380 per dollar in Kuala Lumpur today and has risen 2.8 percent in the last three months, according to data compiled by Bloomberg.

Growth Prospects

With “firm” growth prospects and inflation expected to remain above its long-run average because of domestic cost pressures, there are signs of a continued build-up of financial imbalances, the central bank said today.

“While the macro and micro prudential measures have had a moderating impact on the growth of household indebtedness, the current monetary and financial conditions could lead to a broader build up in economic and financial imbalances,” it said. “Going forward, the degree of monetary accommodation may need to be adjusted to ensure that the risks arising from the accumulation of these imbalances would not undermine the growth prospects of the Malaysian economy.”

Higher fuel prices and electricity tariffs have driven inflation in Southeast Asia’s third-biggest economy to the fastest in more than two years. Consumer prices rose 3.5 percent in March from a year earlier, matching the fastest pace since June 2011.

Economic Support

Inflation will probably accelerate somewhat next year as a result of tax increases and then moderate to about 3 percent in 2016, Zeti said in April.

Malaysia’s economy will remain supported by domestic demand and its exports will benefit from a recovery in advanced nations and regionally, the central bank said today.

“Private sector spending is expected to remain robust,” the central bank said. “Investment activity is supported by broad-based capital spending, particularly in the manufacturing and services sectors. Private consumption will be underpinned by stable income growth and favorable labor market conditions.”

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