Malaysia Pauses After Surprise July Rate Cut as Budget Looms

  • Bond investors see room for further policy easing this year
  • Government may announce stimulus measures in October budget

Malaysia’s central bank left its benchmark interest rate unchanged following July’s surprise cut, as policy makers wait to see if the government will adopt additional stimulus measures in its budget next month.

Bank Negara Malaysia kept the overnight policy rate at 3 percent, it said in a statement in Kuala Lumpur Wednesday. The decision was predicted by 14 of 17 economists surveyed by Bloomberg News, with the rest expecting a quarter-percentage point reduction.

Governor Muhammad Ibrahim reduced the rate by 25 basis points just two months after taking office, saying it was a pre-emptive move to ensure the economy expands within the forecast range of 4 percent to 4.5 percent this year. Bond investors are betting that easing inflation will give the central bank room to lower borrowing costs again in coming months.

“Our sense is they are still quite keen on cutting rates, but they’ll probably wait out a bit more,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “They are also waiting for details from the 2017 budget coming out in October. Although we think the government is still quite keen on juicing up growth, but the room for them to do so is obviously limited.”

Bank Negara lowered its 2016 inflation estimate in July to between 2 percent to 3 percent, from as high as 3.5 percent. Inflation is expected to be at the lower end of the new range this year and remain relatively stable in 2017, it said Wednesday. Consumer prices rose 1.1 percent in July from a year earlier, down from 1.6 percent in June.

The ringgit strengthened 0.4 percent to 4.0662 per dollar as of 4:32 p.m. in Kuala Lumpur. That pared its losses over the past month to about 1.1 percent, still making it the worst performer in Asia.

The economy is projected to expand within expectations in 2016 and stay on a steady growth path next year, Bank Negara said. Growth will be supported by private consumption and investment activity, helped by ongoing infrastructure projects and capital spending in the manufacturing and services sectors, it said, adding that export growth is expected to remain weak.

At the current level for the benchmark rate, “the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation,” the central bank said.

The yield on three-year sovereign notes has closed below the overnight rate every day since the last rate cut on July 13. 

Malaysia may announce measures in its budget to help middle-income households own homes and will continue cash handouts to the poor, Second Finance Minister Johari Abdul Ghani said this week.

— With assistance by Michael J Munoz

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