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Zeti signals no need for Malaysian rate cut in near future

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Malaysian central bank Governor Zeti Akhtar Aziz signaled she sees no need for an interest-rate cut in the near future, barring the threat of a "fundamental" downturn in the economy.

[KUALA LUMPUR] Malaysian central bank Governor Zeti Akhtar Aziz signaled she sees no need for an interest-rate cut in the near future, barring the threat of a "fundamental" downturn in the economy.

"We are on a steady growth path," Ms Zeti said in an interview in Kuala Lumpur Thursday, when asked if she was suggesting Malaysia wouldn't change rates in the near term. "If there was a fundamental economic slowdown, the risk to that going forward, on the horizon, then it would prompt a downward adjustment." With above-5 per cent growth and inflation near the slowest since 2009, Bank Negara Malaysia has held borrowing costs steady for four straight meetings even as dozens of central banks eased monetary policy this year. While the economy unexpectedly quickened in the final quarter of 2014 on private consumption and investment, the government has trimmed its forecast for this year as it cuts spending amid less revenue from oil.

The ringgit has lost 9.7 per cent in the past six months, among the worst performers in Asia, as the drop in crude hurt government finances and dented investor confidence.

There is a lack of recognition that Malaysia has a "highly-diverse economic structure," and isn't just an oil producer, Ms Zeti said. About 80 per cent of the Malaysian economy isn't linked to oil and gas, she said.

Consumer-price gains may be at the lower end of a 2 per cent to 3 per cent range in 2015, and inflation isn't a concern at this point in time, Ms Zeti said.

On Hold Bank Negara kept the overnight policy rate at 3.25 per cent in March. The next decision will be on May 7. The central bank will hold its key rate for the rest of the year, according to 16 of 20 economists surveyed by Bloomberg in February.

"The ringgit has not been taken into consideration in our interest-rate policy," Ms Zeti said, when asked if the currency's weakness keeps the central bank from joining counterparts in easing. "We look at the risks to inflation and the risks to growth. And we also look at the risks of destabilising financial imbalances." The Malaysian government, which forecasts growth to be between 4.5 percent and 5.5 per cent this year, implemented a new consumption tax of 6 per cent in April. While the experience in other countries showed a moderation in consumer spending in the first year of such a tax, the decline in oil prices may be a buffer to an expected easing in consumption, Ms Zeti said.

It's too soon to tell if spending slowed in Malaysia after the goods and service tax started, Malayan Banking Bhd Chief Financial Officer Rafique Merican Wahiduddin said Thursday.

Asked about what China needs to do to make the yuan as attractive a reserves asset as the dollar for central banks, Ms Zeti said it is already an attractive one.

Malaysia began diversifying its reserves in 2003, when it adjusted its composition into currencies such as the euro and those of emerging markets, which include China, she said. Ms Zeti said she couldn't disclose the central bank's future strategy or composition of reserves, when asked if there is a plan to hold more yuan.

"We already have a highly-diversified portfolio structure and we are happy with the composition that we have now," she said. "It's highly-diversified in the major advanced economies and also emerging economies. Emerging economies in Asia, and even in Latin America." Ms Zeti is one of the region's longest-serving governors who helped oversee Malaysia's monetary and currency responses to the Asian financial crisis more than a decade ago. She took the helm at Bank Negara in May 2000 and her current five-year term will end next year.

"At this point in time, I don't look beyond that," she said when asked if she plans to stay on. "We have succession five levels down. And we have done organizational transformation three times during my term in office. So I would leave it as a solid institution to continue."

BLOOMBERG