KUALA LUMPUR, March 4 — Malaysia’s central bank will likely hold its key interest rate steady at a review tomorrow amid softening economic conditions as an easing may prompt more capital outflows.

Economists in a Reuters poll were unanimous in their forecasts for Bank Negara to keep its overnight policy rate unchanged at 3.25 per cent, even as countries in the region have loosened policy due to easing inflation

The central bank raised its policy rate by 25 basis points last July, but it may stay on pause as lower inflation offsets other economic risks.

“The inflation risk has subsided significantly in the last three months,” said Chua Hak Bin, economist at Bank of America Merrill Lynch, adding that the expected inflation hike from an upcoming consumption tax had now been “whittled down”.

The ringgit is vulnerable to outflows from weak oil and commodities prices, which have put a strain on Malaysia’s reserves. The ringgit, down 3.6 per cent so far this year, is the second-worst performing currency in emerging Asia.

The Southeast Asian country, a net oil and commodities exporter, has seen its current account surplus shrink and pressure build on its fiscal deficit from falling prices.

“As investor wariness over Malaysia’s fiscal and external positions persists amid low global crude oil prices, we think the central bank - whose FX reserves continue to look a little thin - is unlikely to want to risk further portfolio outflows through an unexpected rate cut this week,” Su Sian Lim, economist at HSBC, said in a research report.

Despite the country’s strong performance in the fourth quarter of 2014, with gross domestic product (GDP) at 5.8 per cent, reserves and the ringgit have dropped significantly.

Low inflation

But with inflation at its lowest since 2009, there is a possibility that Bank Negara may follow some of its Asian counterparts, such as China and India, by cutting rates.

“The probability of a surprise is no longer zero,” said Chua.

In January, inflation was at 1.0 per cent, although it could have spiked during the Lunar New Year in February and a fuel price hike in March.

Economists still expect inflation to pick up in April, when a consumer tax of 6 per cent kicks in.

Kristina Fong from Ratings Agency Malaysia said the research house did not foresee rate changes in the first half of 2015 but that it was crucial to monitor “price trends” thereafter.

Last month, Bank Negara said headline inflation was expected to decline and that its monetary policy remains accommodative. — Reuters