Malaysia holds policy interest rate at 3%

Night falls over the Malaysian capital Kuala Lumpur. Malaysia's economy is forecast to expand at a seven-year low of 4 per cent to 4.5 per cent in 2016.
Night falls over the Malaysian capital Kuala Lumpur. Malaysia's economy is forecast to expand at a seven-year low of 4 per cent to 4.5 per cent in 2016.PHOTO: REUTERS

Central bank sends signal that it is focused on protecting ringgit

KUALA LUMPUR • Malaysia yesterday kept its benchmark interest rate unchanged in the face of a weakening currency, a sign that policymakers are focused on protecting the ringgit rather than spurring economic growth.

Bank Negara Malaysia said in a statement that it was holding the overnight policy rate at 3 per cent and that it foresaw more volatility in financial markets, with the ringgit losing 5 per cent against the US dollar in the two weeks since Mr Donald Trump won the US presidential election.

Malaysia has been hard hit by capital outflows from emerging markets as investors expect US interest rates to rise faster under a Trump administration that is expected to opt for an expansionary fiscal strategy that will fuel inflation.

Yesterday, the ringgit hit a 13- month low of 4.438 per US dollar. It was trading at 3.12 per Singdollar.

Many economists had expected Bank Negara to leave the overnight policy rate unchanged at its regular policy review, due to the pressure on the currency.

The central bank said in a statement that it expects periods of volatility in regional financial and foreign exchange markets due to global uncertainties.

"In this regard, Bank Negara will continue to provide liquidity to ensure the orderly functioning of the domestic foreign exchange market," it said, adding that banking system liquidity is "ample".

The ringgit's decline has prompted the central bank to warn banks and traders against selling the currency on the offshore non-deliverable forwards market.

The currency market volatility will probably keep the central bank from cutting rates in the near term, analysts said.

In July, Bank Negara unexpectedly cut its key rate by 25 basis points. Prior to that, the rate had been held steady for seven years at 3.25 per cent. "If we see the US dollar strengthening, then we may even see a need for a rate hike," said Mr Vaninder Singh, an economist for RBS in Singapore.

Once among South-east Asia's powerhouses, Malaysia's economy is forecast to expand at a seven- year low of 4 per cent to 4.5 per cent in 2016.

Bank Negara said inflation will probably be at the lower end of the 2 per cent to 2.5 per cent forecast range for this year and is "expected to remain relatively stable in 2017".

The country's international reserves have dwindled to the point that they only cover 1.2 times short-term external debt.

The central bank said export growth will likely be weighed down by soft demand from key trade partners.

"Going forward, private sector activity will remain the key driver of growth," the central bank said in a statement.

REUTERS, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on November 24, 2016, with the headline 'Malaysia holds policy interest rate at 3%'. Print Edition | Subscribe