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Malaysia holds key rates steady at 3.5%

KUALA LUMPUR: Malaysia left its key interest rate steady at 3.50 percent on Monday, despite inflation near a 7-year high, calling a halt for now to a series of rate rises as consumers began to feel the pinch.

With economic growth appearing to ease, Bank Negara pointed to few signs of demand-induced price pressures and played down concerns about oil-fuelled inflation after raising rates three times since last November.

“At this stage, limited evidence of second round effects and lack of indications of demand-induced inflationary pressures imply that the monetary policy response can take a pause,” the central bank said in a statement.

“Monetary policy will continue to be vigilant to inflationary risks and would respond to any risk of inflation becoming a threat to the medium and longer-term prospects of the economy.”

A Reuters poll of economists last week showed a 50 percent chance that Bank Negara would lift the key rate on Monday.

Prior to Monday’s meeting, which was the fourth of eight scheduled for 2006, the monetary policy committee had raised the benchmark overnight rate by a total of 80 basis points at meetings in November, February and April.

Economists saw Monday’s rate decision as a pause, and not an end, to the bank’s monetary tightening campaign.

“Essentially, the central bank will continue to maintain a tightening bias,” said Wong Chee Seng, chief economist at local investment bank ECM Libra.

“The real interest rate, which is still negative, is still a policy focus. And there is an interest on the part of the authorities to catch up with regional markets.”

At 3.50 percent, Malaysia’s benchmark interest rate is among the lowest in Asia. Annual inflation stood at 4.6 percent in April, having hit a 7-year high of 4.8 percent in March. Galloping global energy costs are pushing up consumer prices, with fuel prices rising as the government cuts subsidies to reduce its fiscal deficit.

Economists think consumer prices could rise further as the government is expected to allow power distributor Tenaga Nasional to raise electricity tariffs.

Bank Negara expects inflation to average 3.5 percent to 4.0 percent this year, compared with 3.0 percent in 2005. The ringgit and the benchmark 5-year government bond’s yield were unchanged after the rate decision. Trading in the stock market had closed.

Consumer concern: Signs of cooling growth could have stayed the central bank’s hand and persuaded it to keep rates steady, economists said.

“One hidden concern that Malaysian authorities have is that if they raise interest rates to the extent that it could affect consumer sentiment, that could make the economic growth rate moderate,” said Tomo Kinoshita, chief economist for Asia ex-Japan with Nomura Singapore.

He said consumer loans, including housing loans, accounted for more than 50 percent of total loans outstanding.

The annual rise in Malaysia’s March exports set the weakest pace in six months, while first-quarter consumer confidence measured by the Malaysian Institute of Economic Research dropped below the key 100-point level for the first time in four years.

However, the central bank said the growth outlook was positive. “The Malaysian economy is expected to maintain its momentum on the basis of favourable domestic and external conditions,” it said.

A firmer Malaysian ringgit was helping counter price pressures, economists said. The ringgit has appreciated about 4.5 percent since its peg against the US dollar was dropped last July. Reuters

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