Malaysia Central Bank Holds Interest Rate in Aftermath of Polls

(Bloomberg) -- Malaysia’s central bank provided policy stability by keeping its benchmark interest rate unchanged on Thursday after a surprise election victory by opposition leader Mahathir Mohamad.

Bank Negara Malaysia left the overnight policy rate at 3.25 percent, it said in a statement in Kuala Lumpur on Thursday, as predicted by all 18 economists in a Bloomberg survey.

Policy makers sought to address investor concerns after the election result, saying Malaysia’s economic outlook remains positive and “fundamentals are strongly anchored.”

“The domestic economic outlook remains positive, the financial sector is strong and monetary and financial conditions are supportive of economic growth in the post-election environment,” the central bank said.

What Our Economists Say...

Opposition leader Mahathir Mohamad’s campaign promises were growth-friendly, but if carried out may also stoke inflation. This means there could be more rate hikes before the year is over. For now, it is too early to say as details about the implementation of campaign promises are still needed.
-- Tamara Henderson, Bloomberg Economics

Bank Negara was one of the first central banks in Asia to raise rates this year with a hike in January, allowing it to hold off of any further tightening just yet. Inflation is subdued, easing to 1.3 percent in March, the slowest pace since July 2016.

While price pressures are expected to remain moderate this year, “the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain,” the central bank said.

Volatile Markets

In a post election environment, investors are seeking policy continuity, with a focus on sustaining strong economic growth, curbing the budget deficit and managing market risks. Mahathir has pledged to scrap a contentious goods-and-services tax within 100 days in power. Financial markets are closed Thursday and Friday after the government declared public holidays.

Malaysia is one of the least affected of emerging markets globally from financial volatility amid a stronger dollar and a pick-up in U.S. interest rates. The benchmark stock index climbed to a record in April, helped by foreign inflows, and while the ringgit has taken a knock in recent weeks, it’s still up more than 2 percent against the dollar this year.

Neighbors like the Philippines and Indonesia have suffered stock outflows and currency slumps that are among the worst in Asia. The Philippines is set to raise interest rates later on Thursday, which would the first hike since 2014, while Indonesia’s central bank has also said it’s prepared to move to help restore confidence in the currency.

©2018 Bloomberg L.P.

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