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Malaysia’s central bank holds key interest rate
July 13, 2018
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KUALA LUMPUR: Malaysia’s central bank left its key interest rate unchanged, saying inflation is not a worry and the economy is likely to “remain on a steady growth path”.

Bank Negara Malaysia (BNM) left its overnight policy rate at 3.25 per cent, as forecast by all 10 economists in a Reuters poll.

Wednesday’s policy meeting was the first under Governor Nor Shamsiah Mohd Yunus, and the second since a May election that brought Malaysia’s first change of government since independence in 1957.

In a statement, BNM said it expects sustained growth with support from private and external demand, helped by slowing inflation due to recent policy measures by the new government.

“The positive domestic economic outlook, sound financial sector and improving current account surplus of the balance of payments will continue to support Malaysia’s fundamentals,” the central bank said.

Without mentioning the US-China dispute, BNM said global trade tensions could hurt the broader economic outlook.

“Growth in Asia will be supported by sustained domestic activity and external demand, “ it said. “However, the balance of risks to the outlook has tilted to the downside”.

BNM said Malaysian headline inflation, which as 1.8 per cent in May, is expected to be lower than the 2.0-3.0 per cent initially forecast for 2018, and likely turn negative “in some months” as domestic cost factors are adjusted to the new government’s policies.

In one of his earliest acts after returning as prime minister, Mahathir Mohamad scrapped a 6 per cent goods and services tax (GST) implemented by the previous government.

Julia Goh, an economist with UOB Bank, said BNM’s inflation outlook, coupled with a more dovish tone, indicate it wants to avoid jumping the gun on a rate change while it’s unclear how much the United State-China trade fight expands.

“It really depends on how far Trump’s going to go with his trade war and how far China will retaliate. I’d save my bullets,” Goh said.

Malaysia faces less pressure to raise interest rates than other emerging markets because of the performance of the ringgit , which has strengthened slightly against the US dollar this year.

It has fallen since early April, but its overall resiliency - aided by Malaysia’s current account surplus - is one reason economists have said that BNM, unlike Indonesia’s central bank, does not need to hike the rate.

“Domestic financial markets have remained resilient despite non-resident portfolio outflows,” BNM said on Wednesday. “The ringgit exchange rate would be more reflective of the underlying fundamentals of the economy when the external and domestic uncertainties recede.”

In January, with the economy growing robustly and inflation elevated, BNM raised its benchmark rate 25 basis points to “normalise policy”.


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