Malaysia's central bank likely to hold rates steady while uncertainties stack up

[KUALA LUMPUR] Malaysia's central bank will likely hold its key interest rate steady at a policy review on Friday as a weakened global economy, battered ringgit and uncertain domestic politics keep policymakers in check.

Economists in a Reuters poll were unanimous in their forecasts for Bank Negara Malaysia (BNM) to keep its overnight policy rate unchanged at 3.25 per cent, as risks to Malaysia's economic growth remain.

With the country's currency, the ringgit, plummeting to 17-year lows, economists do not see central bank resorting to using interest rates as a policy tool.

Economists say that the most likely policy action to stabilise capital outflows is to repatriate government-linked firms' overseas investments and repatriate Forex earnings.

However, Bank Negara would likely adopt a wait and see approach until the U.S Federal Reserves decides if it would raise rates. "There's no point to use up their bullets now. It would be more prudent to store those measures in their arsenal first,"said Michael Wan, economist at Credit Suisse.

The ringgit has lost over 19 per cent in the year-to-date, making it the worst performing emerging Asia currency. The ringgit hit 4.3450 on Thursday.

Malaysia has been gripped by politicial tensions which escalated in early July after a Wall Street Journal report on indebted state fund 1MDB reported that close to US$700 muillion had been deposited in an account held by Prime Minister Najib Razak.

Najib, who also chairs 1MDB, has denied any wrongdoing, but the scandal has not died down. Last month, an anti-government rally drew tens of thousands of protesters, calling for Najib's resignation, to the streets of Kuala Lumpur.

SLOWING GROWTH

Like other Southeast Asian countries that count China as their biggest trading partner, Malaysia is feeling a chill wind from the slowdown in the world's second largest economy.

Malaysia's economy grew 4.9 per cent growth in the second quarter, slowing from 5.6 per cent in the first quarter.

Domestic consumption, which accounts for 52 per cent of the country's gross domestic product is expanding at a slower rate after the introduction of a 6 per cent consumption tax in April.

Economists expect growth to turn more sluggish in the second half as the outlook for the global economy remains uncertain, and that central bank is unlikely to adjust rates anytime soon. "The last thing you want is in order to stem pressure on ringgit to depreciate, you risk exerting unnecessary pressure on growth," said Irvin Seah of DBS.

In August, Bank Negara said that the current interest rate"remained supportive of economic activity".

The country's economy relies heavily on exports from the commodities, electrical and electronics sector. The latter helped sustain export growth this year.

But in coming months, Malaysia's exports growth could suffer as surveys show manufacturers are reporting fewer orders.

REUTERS