Malaysia central bank holds key rate, upbeat on path ahead for economy

Malaysian ringgit notes are seen among other currency notes in this photo illustration taken in Singapore on March 14.
Malaysian ringgit notes are seen among other currency notes in this photo illustration taken in Singapore on March 14. PHOTO: REUTERS

KUALA LUMPUR (REUTERS) - Malaysia's central bank kept its benchmark interest rate unchanged on Thursday (July 13), saying it expects improved global growth prospects to sustain solid exports and generate "positive spillovers" to the domestic economy.

As expected, Bank Negara Malaysia (BNM) maintained the overnight policy rate at 3.00 per cent, where it has been since a 25 basis point cut one year ago.

Earlier this year, when annual inflation topped 5 per cent, some analysts predicted at least one rate hike in the second half.

But now, with inflation moderating, the chance of a rate hike soon has diminished, though that could change if the Federal Reserve hikes US rates a third time this year. "BNM didn't give any hint of possibly raising rates. They continued to signal a neutral stance for now," said Julia Goh, an economist for UOB Bank. "But we don't rule out the possibility of a hike next year." For there to be a hike, economic growth has to be at least 5 per cent and there needs to be wage pressure raising inflation, she said.

The central bank, which earlier forecast expansion of 4.3-4.8 per cent this year, said the economy is expected to register "higher growth" in 2017. It did not specify if that meant stronger growth than its 2017 forecast, or than last year's rate of 4.2 per cent.

BNM said growth will be driven by sustained export performance, given a more favourable global outlook. Private consumption will be underpinned by higher wages and employment, and new and ongoing infrastructure projects have driven an improved investment outlook, the central bank said.

Malaysia's economy grew at a better-than-expected 5.6 per cent annual rate in the first quarter - the quickest pace in two years - on robust exports and strong domestic demand.

Second-quarter growth data will be released on Aug. 18.

In May, exports surged 32.5 per cent from a year earlier, well above economists' forecasts.

The ringgit has recovered from being among the weakest emerging Asian currencies in 2016, following measures by the central bank to reduce volatility in the ringgit and domestic forex market. It has strengthened more than 4 per cent against the dollar this year.

Headline inflation eased to 3.9 per cent in May after hitting an eight-year high of 5.1 per cent in March.

BNM said the pace is expected to moderate in the second half, "mainly reflecting the waning effect of global cost factors".

"Underlying inflation, as measured by core inflation, will be sustained by the more robust domestic demand but is expected to remain contained," it said.

The central bank said Malaysia continues to face risks from political and policy uncertainties in the major economies and volatility of commodity prices.