Malaysia central bank holds policy rate as expected, highlights risks to growth

KUALA LUMPUR (REUTERS) - Malaysia's central bank left its key interest rate unchanged at 3 per cent on Thursday as expected, but warned that the outlook for growth and inflation has become more uncertain.

Bank Negara Malaysia's monetary policy committee said inflation remained benign at 1.7 per cent in the first seven months this year, but would likely increase in the coming months, partly due a cut this week in fuel subsidies.

"The increase in inflation, however, is from a low level and will be mitigated by a stable external price environment, expansion in domestic capacity and moderate domestic demand pressures," the central bank said in a statement.

Malaysia's economic growth will continue to be underpinned by domestic activity, helped in part by large infrastructure projects, the bank said, but added that risks in the global economy and international financial markets could dent prospects.

The government this week reduced fuel subsidies for the first time since December 2010 as it looked to improve the country's fiscal position, which had spurred capital outflows. The move came after Malaysia's trade-reliant economy incurred a huge dent to its current account balance in the second quarter. The surplus narrowed to RM2.6 billion (S$1 billion) from RM8.7 billion in the first three months of the year.

The central bank's statement made no specific mention of the ringgit, which has weakened more than 7 per cent this year against the US dollar. It noted that the reversal of capital flows from emerging economies flows "has resulted in the depreciation of emerging market currencies".

Bank Negara has kept the overnight policy rate on hold since May 2011 to boost domestic consumption and combat weakness in the country's major export markets for commodities and electronics. Since then, it has reiterated that 3 per cent is still supportive of the economy.