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Malaysia Holds Rate To Support Expansion As Price Pressures Grow
Perspective | 13 November 2014

Malaysia kept its benchmark interest rate steady for a second meeting to support growth as a cut in fuel subsidies threatens private consumption and adds to inflationary pressures.

Bank Negara Malaysia held the overnight policy rate at 3.3 percent, it said in a statement in Kuala Lumpur on 6 November. The decision was predicted by 23 of 24 economists surveyed by Bloomberg News, while one projected a 25 basis-point increase. The central bank last raised rates in July.

A growth divergence in major economies is adding to uncertainty of the global recovery, prompting Malaysian central bank Governor Zeti Akhtar Aziz to say in October monetary policy needs to remain accommodative to support expansion. Demand for the Southeast Asian nation’s exports weakened last quarter, while rising costs are hurting companies and consumers.

“They will not be in a rush to raise interest rates further,” Ho Woei Chen, an economist at United Overseas Bank in Singapore, said before the decision. “If you look at the impact of the fuel price hike, it’s going to affect consumption. And if they were to hike another 25 basis points at this time, when inflation has not, is not going to spike up, that is going to weigh down on the economic outlook.”

The ringgit rose 0.3 percent against the US dollar on 6 November, paring its loss this quarter to 1.7 percent, according to data compiled by Bloomberg. Interest-rate swaps show traders are pricing in a 50 basis-point increase in borrowing costs in the next year.

Growth Threats

The government forecasts gross domestic product growth of as much as 6 percent this year and next. Threats to Malaysia’s expansion have risen as policies in advanced economies lead to higher volatility, Zeti said in an 11 October interview.

“The current stance of monetary policy remains accommodative and is assessed to be appropriate given the developments in monetary and financial conditions,” the central bank said on 6 November. “Moving forward, the Monetary Policy Committee will continue to carefully assess the balance of risks surrounding the outlook for domestic growth and inflation.”

The Bank of Japan’s unexpected expansion of its record stimulus program on 31 October came in the same week the Federal Reserve judged the US economy strong enough to end its own asset purchase plan.

“For Malaysia, while domestic demand has continued to support growth, exports have shown signs of moderation,” the central bank said. “Going forward, domestic demand will still remain the key driver of growth. Private consumption is expected to moderate, but investment activity is projected to remain robust.”

Malaysia’s inflation rate was 2.6 percent in September, easing from a 3.3 percent pace in August. The government raised fuel prices by about 10 percent in October, while some gas tariffs were increased this month.

Consumer prices are forecast by the government to climb 4 percent to 5 percent next year, the fastest since 2008. A goods and services tax of 6 percent will start in April 2015, an added burden on businesses and households after food and fuel subsidy cuts in recent years.

Accelerating price gains are temporary, and will ease to the long-term average of 3 percent by 2016, Zeti said in October.

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