Malaysia Refrains From Rate Increase to Buoy Growth
Malaysia's central bank kept its benchmark interest rate unchanged to avoid exacerbating an economic slowdown, breaking with its neighbors in betting inflation won't spread beyond food and fuel.
Bank Negara Malaysia maintained its overnight policy rate at 3.5 percent for a 19th straight meeting today, it said in a statement in Kuala Lumpur. The decision was predicted by 12 of the 20 economists surveyed by Bloomberg News. The other eight expected an increase to 3.75 percent.
Malaysia has avoided following Thailand, Indonesia, India, Vietnam and the Philippines in raising borrowing costs this year as a deepening global slowdown threatens Asian growth. Central Bank Governor Zeti Akhtar Aziz has said she expects commodity prices, which drove inflation to a 26-year high last month, to ease next year as expansion cools around the world.
“Inflation in June and July showed no strong secondary effect beyond food and fuel,'' said Suhaimi Ilias, an economist at Aseambankers Malaysia Bhd. “The risk of secondary inflation is also being kept in check by the risks of a slowing economy and a softening job market, with extra relief from the retreat in commodity prices.''
Malaysia's economic expansion probably slowed in the second quarter, a Bloomberg survey of economists shows ahead of an Aug. 29 central bank release. The U.S., Malaysia's largest export market, is close to a recession and Japan's economy contracted in the second quarter.
`Avoid' Downturn
Crude oil in New York has fallen by more than a fifth since reaching a record $147.27 a barrel on July 11, allowing Malaysia's government last week to reverse some of the fuel price increases it announced in June.
“With the expected moderation in inflation in the medium term, the greater priority is to avoid a fundamental downturn in economic activity,'' the central bank said in today's statement.
Malaysia's inflation accelerated to 8.5 percent in July after the government increased retail gasoline prices 41 percent and diesel rates 63 percent in June to prevent subsidies that keep pump costs artificially low from spiraling amid soaring oil prices. Electricity rates also rose in July.
Prime Minister Abdullah Ahmad Badawi, who is trying to prevent opposition leader Anwar Ibrahim from winning a by- election tomorrow, announced a 5.6 percent cut in gasoline prices and a 3.1 percent reduction in diesel costs last week, saying he wants to ease the burden of consumers and reduce inflationary pressure payday loan.
`Tricky' Decision
Today's decision may reduce the chances of rate increases in the remaining months of 2008, said Wan Suhaimi Saidi, an economist at Kenanga Investment Bank Bhd. in Kuala Lumpur, who had expected the central bank to raise the benchmark today to prevent inflation from further outpacing savings rates.
“They might raise rates but the propensity to do so is less as growth concerns could overtake inflationary risk,'' he said. “The decision was tricky because the negative real rates have widened a lot. It is made trickier by the fact that the Permatang Pauh by-election is tomorrow. The powers that be don't want to be seen to be making unpopular policy decisions.''
Voter anger over rising prices contributed to opposition gains in March elections that deprived Prime Minister Abdullah's ruling coalition of its two-thirds majority in parliament. Anwar, a former deputy premier, would return to the legislature for the first time in a decade should he win tomorrow's vote.
By-Election
Anwar, 61, is now the leader of an alliance of opposition parties and has said he plans to lure enough lawmakers from the ruling coalition to form a new government next month. He has promised to reduce fuel prices should he seize power.
Bank Negara, which hasn't raised borrowing costs since April 2006, last month increased this year's inflation forecast to between 5.5 percent and 6 percent. Slowing growth will cause inflation to ease in the second half of 2009, the central bank said today.
“The weaker economic conditions will reduce the likelihood of second-round effects that will generate persistent inflationary trends,'' today's statement said.
Still, failure to increase interest rates may add downward pressure on the ringgit, after other Asian central banks raised their benchmarks, said Kenanga's Wan Suhaimi.
“The currency will have a weakening bias after this decision,'' he said. A weaker currency would cause import costs to rise and hurt consumer demand, he added.