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Malaysia central bank holds rate amid subdued inflation

Move expected as it is under little pressure to tighten policy unlike peers in Indonesia and Philippines

Kuala Lumpur

MALAYSIA'S central bank kept its benchmark interest rate unchanged on the back of low inflation and tempered economic growth expectations for the year.

Bank Negara Malaysia left the overnight policy rate at 3.25 per cent, it said in a statement in Kuala Lumpur on Wednesday, as predicted by all 17 economists in a Bloomberg survey.

"In the immediate term, the economy faces downside risks stemming from heightened trade tensions, prolonged weakness in the mining and agriculture sectors and some domestic policy uncertainty," the central bank said. "On balance, the Malaysian economy is expected to remain on a steady growth path."

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The central bank is under little pressure to tighten policy, in contrast to peers in Indonesia and the Philippines, which are facing calls for more interest-rate hikes. Inflation in Malaysia remains low and its currency and economy have been relatively sheltered from the rout sweeping across emerging markets.

"The statement is neutral and we expect them to keep rates on hold for the rest of the year," said Jonathan Koh, an economist at Standard Chartered Plc in Singapore. "The focus will be more on growth rather than inflation, and there is increasing risk that the central bank may potentially cut rates."

Economists are also closely looking at what steps Finance Minister Lim Guan Eng will take to cut debt and liabilities that exceed RM1 trillion (S$332.7 billion) and how the government will raise enough revenue to keep the budget deficit under control.

Inflation, which eased to below one per cent in June and July, is expected to edge upwards through 2019, the central bank said. A sales and services tax took effect in September, following three months of no consumption levies from June, when the government scrapped a 6 per cent levy.

"The impact of the changes in the consumption tax policy on headline inflation will be transitory and lapse towards the end of 2019," the central bank said. "Underlying inflation is nevertheless expected to remain relatively stable."

The ringgit fell a fifth day to 4.1445 per dollar, the weakest level in nine months. The currency has lost 2.4 per cent this year, compared with a 6.8 per cent decline in the Philippine peso and a more than 9 per cent drop in the Indonesian rupiah.

Malaysia was among the first central banks in Asia to raise rates this year with a hike in January, and almost all economists predict no change for the rest of the year. The economy expanded 4.5 per cent in the second quarter from a year ago, its slowest pace in more than a year. BLOOMBERG