Bank Negara chief has reason to turn more dovish

Kuala Lumpur

MALAYSIA'S new central bank governor presides over her first interest-rate meeting in a better position than most of her peers in South-east Asia.

Unlike her counterparts in Indonesia and the Philippines - who are ramping up rate hikes to defend their currencies - Nor Shamsiah Mohd Yunus doesn't have to do anything for now. Even in Thailand, where rates have been on hold for more than three years and inflation is low, officials are discussing policy normalisation following the baht's slump in the past three months.

In Malaysia, the ringgit has fared better than its peers amid an emerging market sell-off, in part because higher oil prices have bolstered inflows and strengthened the current-account surplus. The scrapping of a consumption tax also means inflation will probably remain low, enabling Ms Shamsiah to dial back some of the hawkishness of her predecessor, who hiked rates in January.

"The hawkish bias in the monetary policy committee is going to definitely come off, which has been there for the last six months," said Rahul Bajoria, a senior economist at Barclays plc in Singapore. While the tone may be tempered, that "doesn't mean that the central bank is going to be ready to cut rates right now", he added.

All 19 economists surveyed by Bloomberg predict Bank Negara Malaysia will hold its benchmark overnight policy rate at 3.25 per cent on Wednesday.

Traders have pared back expectations of future rate hikes, with the market implied policy rate for one year's time declining to 3.26 per cent from 3.41 per cent in May, data compiled by Bloomberg show.

Ms Shamsiah took the helm at the central bank earlier this month under the new government of Prime Minister Mahathir Mohamad.

She's no stranger to central-bank watchers, having previously been at the institution for three decades, and serving as a deputy to former governor Zeti Akhtar Aziz.

With economic policy still in flux, Ms Shamsiah will be seeking to support growth by keeping rates on hold. The government is reviewing spending projects - including a high-speed rail to Singapore and two energy pipeline developments led by Chinese builders - to help bring down debt from RM1 trillion (S$338 billion).

On top of that, a looming trade war between the US and China, Malaysia's biggest trade partners, threatens the outlook for the export-reliant nation. For now, growth forecasts remain solid at more than 5 per cent for this year.

"The economy is re-balancing, so there could be some slowdown in some sectors, which is inevitable," said Rosnani Rasul, an economist at Public Bank Bhd in Kuala Lumpur. If an interest-rate increase means "you're going to choke growth, a cut meaning you need to support growth, I'm biased toward a cut, not a raise," she explained. BLOOMBERG