KUALA LUMPUR, Jan 29 — Malaysia’s central bank kept its benchmark interest rate steady at 3 per cent today, as expected, signalling optimism over the country’s growth prospects that economists expect to result in an interest rate rise later in the year.
Bank Negara Malaysia noted that “broader signs of improvement” have emerged in developed economies and that Malaysia’s robust growth momentum in the last quarter of 2013 was expected to be sustained this year thanks to a pick-up in exports.
It signalled no fresh concern over inflation, despite a spike in the annual rate to the fastest pace in more than two years in December.
“Inflation is expected to average higher largely due to domestic cost factors,” the bank said in a statement.
“Subdued external price pressures and moderate domestic demand conditions will help contain the impact of these cost factors on underlying inflation.”
Malaysia’s annual inflation rate quickened to 3.2 per cent in December from 2.9 per cent in November, the highest level since November 2011 and up from 1.2 per cent in the same month a year earlier.
Faster price rises are partly a result of a series of subsidy cuts introduced by Prime Minister Datuk Seri Najib Razak’s government last year that have eased concerns over the Southeast Asian nation’s high debt burden and fiscal deficit.
Lee Heng Guie, head of economics at CIMB Investment Bank in Kuala Lumpur, said the central bank was downplaying the risk of a possible “second round” inflationary impact that could result from a stronger economy this year.
“We think that they are still in a ‘wait and see’ mode: if the economy holds steady and demand is strong, then there is the risk of a second round effect and Bank Negara could change its current monetary policy stance.”
The central bank has held the rate at 3 per cent since mid-2011, but an acceleration in inflation and an expected pick-up in exports and overall growth this year have prompted many economists to predict a hike of at least 25 basis points this year.
Bank Negara is also facing a period of renewed emerging market jitters that have dragged the ringgit down 1.6 per cent against the dollar this year, making it the second-worst performing emerging market currency in Asia.
The meeting came hours after Turkey’s central bank hiked its overnight rate in dramatic fashion to 12 per cent from 7.75 per cent, stunning investors and alleviating pressure on emerging market assets worldwide.
High foreign holdings of Malaysian government bonds, at around 45 per cent, leave the country particularly vulnerable to market contagion, economists say.
Most economists expect Malaysia’s economy to grow at a robust 5 per cent or more this year, following an expected expansion of 4.5-5.0 per cent in 2013, helped by a brighter global economy that should fuel its vital export sector. — Reuters
