(Bloomberg) -- Malaysia's central bank kept its benchmark interest rate unchanged as expected, after inflation eased and an early rate hike this year helped to bolster the currency.
Bank Negara Malaysia left the overnight policy rate at 3.25 percent, it said in a statement in Kuala Lumpur on Wednesday, as predicted by all 17 economists in a Bloomberg survey.
As one of the first central banks in Asia to raise interest rates this year in January, Bank Negara is facing little pressure to tighten now, with most economists predicting no change for the rest of the year. Inflation is at its lowest level since 2016 while the currency's 14 percent gain against the dollar in the past 12 months is the best in Asia.
“Inflation is projected to average lower in 2018, on expectations of a smaller effect from global cost factors,” the central bank said in its statement. “A stronger ringgit exchange rate compared to 2017 will mitigate import costs.”
Policy Normalization
Bank Negara has said the early move was a preemptive one to ensure the policy stance is appropriate and to prevent a build-up of risks that could arise from interest rates being too low for too long. Governor Muhammad Ibrahim has called it a normalization of policy, rather than a tightening trend.
Malaysia is gearing up for an election that must be held by August, with expectation that it may happen sooner as the police froze overseas travel for its personnel through May, the Star newspaper reported.
Read More: QuickTake explainer on Malaysia's coming general election
“We believe BNM would keep its policy stance unchanged before the general election but possibly tighten again in the first half of 2019,” said Andy Ji, Singapore-based Asian currency strategist at Commonwealth Bank of Australia. A looming trade war poses a risk to the ringgit's recent gain, which has helped ease inflation, he said. “As an upstream economy, Malaysia would be harder hit if U.S.-China trade relation deteriorates.”
The nation's exports beat estimates in January to rise 17.9 percent from a year ago, widening the trade surplus to 9.71 billion ringgit ($2.5 billion), according to the trade and industry ministry. Shipments to the U.S. and China account for 21 percent of the total.
What Our Economist Says...Bank Negara Malaysia appears to be signaling a pause in its tightening cycle, noting that current policy is consistent with steady growth and lower inflation. It kicked off 2018 with a rate hike. Since then, January inflation dropped sharply and risks from protectionism have accelerated. This year already had its challenges without Trump's tariffs. Bloomberg Economics believes further tightening this year is unlikely.-- Tamara Henderson, Bloomberg Economics |
Even as volatility rocked emerging markets in February, foreign investors kept piling into Malaysian assets with about $1.6 billion of net inflows into stocks and bonds this year, according to the latest available data.
Inflation, which moderated to 2.7 percent in January, is forecast by the government to average 2.5 percent to 3.5 percent this year. The economy is projected to expand as much as 5.5 percent in 2018, from 5.9 percent last year.
“BNM continues to sound very positive on growth,” said Rahul Bajoria, a senior economist at Barclays Plc in Singapore, who expects one rate increase in the third quarter if core inflation picks up. “Malaysia is one of the few countries in the region which probably have some room to hike rates without actually creating a huge impact domestically, and the willingness to hike is also there.”
--With assistance from Michael J. Munoz
To contact the reporters on this story: Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net, Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net.
To contact the editors responsible for this story: Yudith Ho at yho35@bloomberg.net, Karl Lester M. Yap, Nasreen Seria
©2018 Bloomberg L.P.
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