Malaysia Keeps Rates on Hold as Currency Tumbles

  • Ringgit has dropped about 5% since Trump’s U.S. election win
  • Government sees economic growth at a seven-year low in 2016

Malaysia kept its benchmark interest rate unchanged in the face of a weakening currency, signaling policy makers are focused on protecting the ringgit rather than spurring economic growth.

Bank Negara Malaysia held the overnight policy rate at 3 percent, it said in a statement in Kuala Lumpur Wednesday, as predicted by all 19 economists in a Bloomberg survey.

After a surprise rate cut in July that fueled expectations of more easing, the central bank is shifting its attention to the ringgit following its slump since the Nov. 8 U.S. elections. The central bank is already clamping down on the offshore trading of its currency to help slow the ringgit’s decline.

“It is more worried about supporting the weak currency than boosting the sluggish economy,” said Krystal Tan, an economist at Capital Economics Ltd. in Singapore, referring to the central bank. “We expect rates to be left on hold for the whole of 2017.”

The Malaysian currency dropped for 11 straight days through Wednesday, and was trading at the lowest level since October 2015. It weakened 0.5 percent to 4.4425 per dollar as of 4:39 p.m. in Kuala Lumpur.

"Bank Negara Malaysia will continue to provide liquidity to ensure the orderly functioning of the domestic foreign-exchange market," it said in its statement. Uncertainties in the global economic and policy environment, as well as geopolitical developments are creating significant volatility in most emerging-market currencies including the ringgit, it said.

The economy remains on track to expand as projected this year and next, the central bank said. Growth is forecast at 4 percent to 4.5 percent in 2016, and 4 percent to 5 percent in 2017.

Inflation will probably average at the lower end of the 2 percent to 2.5 percent forecast range for this year and is “expected to remain relatively stable in 2017,” Bank Negara said.

“If things stabilize, given the Fed tightening cycle, they might actually hike at an opportune time,” said Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd. in Singapore, who forecast the central bank may start tightening policy in the fourth quarter of 2017. “Hiking rates might actually help you to fend off pressure on the currency.”

— With assistance by Michael J Munoz

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