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Malaysia's new central bank governor leaves analysts puzzled

Friday, July 15, 2016 - 13:43
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After years of monetary policy stability and clear signaling on interest-rate moves, Malaysia's new central bank governor has left economists scratching their heads.

[KUALA LUMPUR] After years of monetary policy stability and clear signaling on interest-rate moves, Malaysia's new central bank governor has left economists scratching their heads.

Governor Muhammad Ibrahim's move to cut interest rates this week in only his second policy meeting since taking office in May - surprising all but one of the 18 analysts surveyed by Bloomberg - marked a departure for Bank Negara Malaysia and the precedent set by his well-known predecessor, Zeti Akhtar Aziz.

While the case had been building for an easing in policy, economists were caught off guard by the timing of the move, expecting the central bank to give a clear signal before adjusting interest rates, as had been past convention.

Mr Muhammad told Bernama news agency in an interview on Thursday that the central bank saw a window of opportunity given the slowdown in inflation and cut the benchmark rate by 25 basis points to 3 per cent in a "pre-emptive" move.

"We had thought that the new central bank governor would want to wait to avoid raising questions from investors about whether the new leadership is more dovish than the previous governor," said Michael Wan, an economist at Credit Suisse Group AG.

While a rate cut was on the cards, "the timing was a surprise to us and the market."

Ms Zeti, 68, had proven to be one of the policy makers least likely to surprise markets - she changed interest rates only once in four years in a move predicted by most economists. By contrast, Indonesia's central bank has made five unexpected interest-rate adjustments in 10 moves in the same period.

This week's rate cut was notable because there was no forewarning or hint of policy change in the prior monetary policy statement in May, said Ong Sin Beng, an analyst at JPMorgan Chase & Co.

"The precedent had been for Bank Negara Malaysia to be clearer in its signaling of any imminent change in stance," he said.

The central bank cited lower inflation and risks to economic growth stemming from the UK's decision to leave the European Union. It lowered its inflation forecast for this year to 2 per cent to 3 per cent from 2.5 per cent to 3.5 per cent. Consumer prices rose 2 per cent in May from a year ago.

The rate cut "is intended for the degree of monetary accommodativeness to remain consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation," Bank Negara Malaysia said in its monetary policy statement.

Mr Muhammad, who was born in 1960 and has a master's degree from Harvard University, joined the central bank in 1984 and had been deputy governor since June 2010.

His appointment in May triggered a brief rally in the currency as it ended speculation at the time that Prime Minister Najib Razak may name a governor who was more politically aligned to the government.

The last time the central bank changed interest rates was in July 2014, when it raised the benchmark by 25 basis points. It gave a signal to the market at the meeting prior to that by disclosing in its statement the need to adjust the degree of monetary policy accommodation.

This week's surprise cut "highlights dangers of over- reliance on explicit forward guidance, and may hint at a more aggressive policy reaction under" the new governor, said Kit Wei Zheng, an economist at Citigroup Inc in Singapore.

Mr Muhammad told Bernama there's no plan for a "series of rate cuts," but the Monetary Policy Committee will assess available data and "keep an open mind" every time it meets. The bank is forward-looking on setting policy, he said.

BLOOMBERG