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Malaysia central bank pledges support as GDP forecasts cut

Expansion is seen at 4.3%-4.8% this year; downgrade due to worsening global conditions

Kuala Lumpur

MALAYSIA lowered its economic growth forecast for 2019, and pledged to keep monetary policy accommodative as global risks weigh on the trade-reliant economy.

Gross domestic product (GDP) is expected to increase 4.3 per cent to 4.8 per cent in 2019, with trade tensions and lower commodity prices among the biggest wildcards, Bank Negara Malaysia said in its annual report on Wednesday. The projection marks a step down from the 4.9 per cent expansion estimated in the government's budget released in November, and compares with a 4.7 per cent pace recorded in 2018.

The downgrade in the growth outlook was mainly due to worsening global conditions, Governor Shamsiah Yunus told reporters in Kuala Lumpur. Growth will probably come in at the lower end of the forecast range if downside risks - such as a sharper moderation in global demand and an escalation of trade tensions - become reality, she said.

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"Recognising the downside risks to domestic growth, the thrust of monetary policy in 2019 is to remain accommodative to ensure supportive conditions for sustainable economic growth amid the subdued inflation outlook," the governor wrote in the report. "The bank strives to identify and manage risks before they become destabilising, while building policy space and buffers pre-emptively."

Bank Negara joins a growing list of central banks that are acknowledging the increasing risks to growth, as moderating exports and weakening consumption spur bets for monetary easing across the globe.

The economy is also trying to keep growth afloat while reining in public spending to narrow its biggest fiscal deficit in five years.

The central bank said it's ready to delve into its tool kit to support the economy if needed, with targeted prudential policies and financial market measures among the options at its disposal. A flexible exchange rate also acts as a shock absorber, increasing the economy's resilience when faced with external shocks, it said.

Ms Shamsiah said interest rate decisions will be data dependent, adding that the decline in the inflation rate in the past two months doesn't reflect deflationary conditions, she added.

"The price decline is not pervasive," she noted. "In fact the recent negative inflation was mostly accounted for by lower domestic fuel prices. This is different from a severe drop in spending such that firms generally have to cut prices to attract consumers."

The bank said the economy will be supported by private-sector activity, stable income growth and capacity expansion by businesses.

Risks include Federal Reserve policy, volatility in global oil prices, commodity supply disruptions, and an oversupply in domestic property market.

Ms Shamsiah said GDP growth will be at the lower end of forecast range depending on downside risks, which include a sharper moderation in global demand, escalation of trade tensions, disruption in global financial markets, weaker-than-expected commodity prices and production.

Bank Negara also announced an easing in foreign exchange administration rules for businesses.

Inflation is expected to average 0.7 per cent to 1.7 per cent in 2019, with lower oil prices and a cap on domestic fuel costs keeping a lid on pressures. BLOOMBERG