MALAYSIA HOLDS INTEREST RATE AS ECONOMISTS PONDER NEXT MOVE

Malaysia’s central bank left its benchmark interest rate unchanged, as expected, and provided little clue on its next move.

Key Quotes

  • “Growth in 2017 will be stronger than earlier expected,” the central bank said in a statement on Thursday after keeping its key rate at 3 percent as forecast by all economists.
  • “Headline inflation is forecast to moderate on expectations of a smaller effect from global cost factors,” the central bank said. Inflation slowed every month after reaching an eight-year high in March.
  • “At the current level of the overnight policy rate, the stance of monetary policy remains accommodative,” the bank said. It removed a reference in its July statement to monetary policy being “supportive of economic activity.”

The Backdrop

Bank Negara Malaysia is facing a better economic outlook this year as a global trade recovery spurs exports and price pressures ease, enabling it to keep monetary policy unchanged since a surprise rate cut in July last year. Economic growth has surpassed economists’ expectations for four quarters, while the currency is heading for its first annual gain in five years.

Click to read Malaysia GDP Growth Beats Forecasts as Economy Expands 5.8%

Speculation is starting to mount on whether the central bank may need to tighten monetary policy to ward off any inflation threats as growth picks up. But global uncertainty, a looming election and financial stability risks may give policy makers reason to hold off for now. Malaysia’s household debt of about 88 percent of gross domestic product is among the highest in the region, according to the central bank.

Economist Takeaways

  • “We are personally watching core inflation very closely over the next two or three months, I think that will probably give us an indication whether there’s a need to shift the monetary policy stance,” said Rahul Bajoria, a senior economist at Barclays Plc in Singapore. “Our base case is that probably in the first quarter BNM might hike rates, but that’s not going to be a very aggressive rate hike cycle.”
  • “The improving growth-inflation mix along with ringgit stability and soft U.S. treasury yields suggest that there is little need for BNM to change current policy settings over the course of 2017,” Sanjay Mathur, chief economist for Asean and India at Australia & New Zealand Banking Group Ltd. in Singapore, said in a note after the announcement. “The central bank can maintain an accommodative policy with the objective of nurturing growth further.”

Markets

  • The ringgit extended its gains after the decision, rising 0.6 percent against the dollar as of 4:07 p.m. in Kuala Lumpur
  • The benchmark stock index rose 0.2 percent

— With assistance by Ditas B Lopez

– https://www.bloomberg.com

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