Malaysia Keeps Rate Steady While Warning of Downside Risks

(Bloomberg) --

Malaysia’s central bank kept its benchmark interest rate unchanged on Tuesday following a reduction in May, taking a cautious approach to policy easing amid an uncertain global economy.

The central bank held its overnight rate at 3%, as predicted by 25 of the 28 economists surveyed by Bloomberg. The rest had expected a 25 basis-point cut.

At the current policy rate “the stance of monetary policy remains accommodative and supportive of economic activity,” the central bank said. “The Monetary Policy Committee will continue to assess the balance of risks to domestic growth and inflation, to ensure that the monetary policy stance remains conducive to sustainable growth amid price stability.”

Key Insights

• Malaysia’s export-reliant economy is coming under strain from U.S.-China trade tension and a global slowdown. The central bank kept its growth projection of 4.3% to 4.8% for this year, but said it’s “subject to downside risks from ongoing uncertainties in the global and domestic environment, worsening trade tensions and extended weakness in commodity-related sectors”
• Inflation has been unchanged at 0.2% since March, indicating very little price pressures in the economy. The central bank said price growth will pick up in coming months as the impact of changes in the consumption tax last year wanes
• Governor Nor Shamsiah Mohd Yunus said in an interview last month that the May rate cut was a response to a tightening in financial conditions, and the easing would help support “sustainable growth with stable inflation”
• The July statement is the shortest this year with fewer than 360 words, compared with about 440 in May when the central bank cut interest rates

Economists’ Views

• “With growth set to slow and inflation likely to be subdued, further easing looks likely,” Gareth Leather, senior Asia economist at Capital Economics, wrote in a note. He expects another 25-basis point cut this year, which is likely to happen in September. “Although the economy has held up reasonably well recently, we doubt this resilience will last,” he said
• RHB Research Institute Sdn. expects a rate cut to happen next year instead, said senior economist Vincent Loo Yeong Hong. “The earlier rate cut in May was more of a preemptive move, so they will likely have more time to pause and be cautious,” he said. RHB expects economic growth at 4.5% this year.

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• Foreign investors have been pulling money out of Malaysia’s bond market this year amid expectations the nation will be dropped from a global index. Outflows eased in recent weeks, with foreign investors buying $1.4 billion of the nation’s bonds in June, helping the currency gain 1.2% against the dollar. The ringgit still remains the worst performer in Southeast Asia so far this year, down 0.2%
• The World Bank last week lowered its 2019 growth estimate for Malaysia to 4.6% from 4.7%, though the government remains optimistic it will hit closer to 5% given a pick up in investments

--With assistance from Tomoko Sato.

To contact the reporters on this story: Anuradha Raghu in Kuala Lumpur at araghu3@bloomberg.net;Anisah Shukry in Kuala Lumpur at ashukry2@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michelle Jamrisko, Yudith Ho

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