Malaysia monetary policy to focus on growth after inflation ebbs

[KUALA LUMPUR] Malaysia's central bank said its monetary policy this year will be focused on supporting economic growth as inflation risks abate with the plunge in global crude prices.

Threats to the country's expansion are increasing amid an uneven global recovery and declines in commodity prices, while diverging policy actions in major economies add to uncertainty, Bank Negara Malaysia said in its annual report in Kuala Lumpur on Wednesday. Malaysia, which has Asia's worst-performing currency in the past six months, will probably experience "volatile" capital flows this year along with other emerging markets, it said.

A slump in crude prices is hurting the oil-exporter's finances and has forced the government to reduce spending and lower its growth forecast. Outside Malaysia, interest-rate increases by the Federal Reserve are looming even as Europe's central bank buys bonds and China cuts borrowing costs to sustain growth.

"The operating environment for monetary policy will be shaped by key challenges on the external front, which would affect the overall outlook for the domestic economy," the central bank said. "The focus of policies by the government and the Bank will be on addressing domestic vulnerabilities and supporting the growth of the Malaysian economy."

The ringgit traded at a six-year low today, extending the drop in the past six months against the US dollar to more than 13 per cent, according to data compiled by Bloomberg. Bank Negara won't seek to defend the currency at any specific level and intervenes only to maintain orderly market conditions, central bank Governor Zeti Akhtar Aziz told reporters on Wednesday.

The ringgit is "significantly undervalued" at current levels, she said.

Malaysia's inflation rate is expected to average between 2 per cent and 3 per cent this year, compared with 3.2 per cent in 2014 and lower than an October prediction of as much as 5 per cent. Price gains are forecast to slow even with a new consumption tax of 6 per cent set to start in April, with Bank Negara saying the impact of the levy will be partly offset by the decline in oil.

The central bank left its key rate unchanged for a fourth straight meeting this month as the weakening currency reduced scope for it to join global counterparts in monetary easing. It last raised the benchmark in July after growth quickened and as it sought to curb the risk of financial imbalances.

"In terms of the inflation outlook, the key consideration for monetary policy is the development of underlying inflation, which is expected to remain relatively stable amid modest demand pressures," Bank Negara said. "Monetary policy decisions will also continue to take into account assessments on the potential risk of a further build-up in financial imbalances."

More than 20 central banks from China to the euro-area and India have eased policy this year either by cutting benchmark rates, charging banks more to hold deposits or making it easier for them to lend, tweaking currency bands or announcing bond- buying programs. Many of the shifts, including those by Canada, India and Australia, weren't predicted by investors. Thailand surprised with a rate cut Wednesday.

Malaysia's interest rate remains accommodative and supportive of growth, Ms Zeti said on Wednesday.

"Many central banks that had lowered their interest rates had actually increased their rates prior to that," Ms Zeti said. "We will look at what are the risks to growth, given that there are increased risks on the external horizon. We will also look at what the risks are to inflation."

Malaysia's gross domestic product is projected to expand 4.5 per cent to 5.5 per cent this year, the central bank said, reiterating the trimmed forecast announced by Prime Minister Najib Razak in January. Growth will be supported by a sustained expansion in domestic demand, driven by private sector spending and "resilient" exports, according to the report.

Mr Najib in January unveiled measures that can keep more money in the country, saying Malaysia's current account "must remain in surplus".

The current account surplus is projected to be RM21.4 billion (S$8 billion) in 2015, narrowing from RM49.5 billion last year, according to the report.

BLOOMBERG