Malaysia Keeps Key Rate on Hold as Inflation Set to Stay Low

(Bloomberg) -- Malaysia’s central bank kept its benchmark interest rate unchanged on Tuesday, saying inflation is likely to remain low after the economy slipped into deflation in January.

The central bank kept its overnight policy rate at 3.25 percent, in line with the forecasts of all 22 economists surveyed by Bloomberg. Bank Negara Malaysia has left the rate on hold since raising it by 25 basis points in January 2018.

Malaysia Keeps Key Rate on Hold as Inflation Set to Stay Low

“In the immediate term, inflation is expected to remain low mainly due to policy measures,” the central bank said. “Recognizing that there are downside risks in the economic and financial environment, the monetary policy committee will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.”

Key Insights

  • The central bank now expects inflation to stay low in the immediate term and be “broadly stable” in 2019 as compared to last year, after previously saying that it would trend higher. Consumer prices dropped 0.7 percent in January from a year earlier -- the first decline since the aftermath of the global financial crisis in 2009 -- as fuel costs fell
  • Analysts at Deutsche Bank AG and Nomura Holdings Inc. predict lower interest rates this year, while the majority in a Bloomberg survey still see policy makers staying on hold through 2019
  • Economists expect the government to miss its 4.9 percent growth goal in 2019, predicting 4.5 percent instead, as global risks mount. While exports continue to hold up in Malaysia, purchasing managers surveys signal a downturn. Bank Negara Malaysia expects GDP to remain on “a steady growth path”
  • The budget deficit remains a constraint on the economy, but the government is almost done with its review of projects and spending cuts, which means it may raise expenditure
What Our Economists Say...
Bank Negara Malaysia appears ready to cut its policy rate if needed to support the economy from a weaker external environment. It kept its outlook for stable growth and underlying inflation -- which would argue in favor of a neutral stance. But Tuesday’s statement struck a more cautious tone -- suggesting the potential for further easing.

Read More: BNM Ready to Cut If External Conditions Worsen

-- Tamara Henderson, Bloomberg Economics

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