Bloomberg News

Malaysia Joins Asian Nations in Holding Rates on Inflation

March 09, 2012

Malaysia left interest rates unchanged for a fifth straight meeting as economic growth risks diminished and rising oil prices revive inflation pressure.

Bank Negara Malaysia Governor Zeti Akhtar Aziz kept the benchmark overnight policy rate at 3 percent, the central bank said in a statement in Kuala Lumpur today. The decision was predicted by 19 of 20 economists surveyed by Bloomberg News, with one calling for a quarter-percentage-point cut.

The Southeast Asian nation joined Indonesia and South Korea in holding rates this week as easing concern of a euro-area meltdown and higher oil prices give policy makers room to pause from adding stimulus. Prime Minister Najib Razak said yesterday salaries of civil servants will be raised by as much as 13 percent as part of the 232.8 billion-ringgit ($77 billion) annual budget to spur growth as elections loom.

“Improving global financial conditions have reduced the risks of more aggressive monetary easing,” said Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore. He now predicts the central bank will cut rates by 25 basis points this year, compared with an earlier estimate of 50 basis points.

The ringgit has climbed more than 5 percent against the dollar this year, the best performer after the Indian rupee among 11 Asian currencies tracked by Bloomberg. The FTSE Bursa Malaysia KLCI Index (FBMKLCI) of stocks has gained more than 3 percent.

Price Risks

Headline inflation is expected to moderate in Malaysia this year, even as high global commodity prices continue to pose risks, Bank Negara said in a statement today. Private consumption and business spending are still increasing, the central bank said.

“Domestic demand will continue to drive the expansion of the Malaysian economy,” it said. “However, the overall growth momentum in 2012 is expected to moderate largely due to the weaker external environment.”

Malaysia’s $238 billion economy expanded 5.2 percent in the fourth quarter from a year earlier, slowing from a 5.8 percent pace in the previous three months. The government is boosting spending on roads and railways to spur growth to between 5 percent and 6 percent this year, ahead of general elections that must be held by early 2013.

“Downside risks to growth are contained in the country,” Radhika Rao, an economist at Forecast Pte in Singapore, said before the announcement. Higher wages and rising oil prices may fuel inflation expectations and growth risks are “not too severe right now,” giving the central bank scope to maintain rates this year, she said.

The International Monetary Fund predicts growth in Malaysia may slow to 4 percent in 2012, and Zeti said last month the central bank will keep interest rates “accommodative” as the outlook for the global economy remains uncertain. Bank Negara last raised the benchmark rate in May.

To contact the reporter on this story: Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net

To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net


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