Malaysia's central bank seen keeping rates on hold as inflation stays manageable: poll

[KUALA LUMPUR] Malaysia's central bank is expected to leave its benchmark rate unchanged at its policy review on Thursday, a Reuters poll showed, as inflation remains manageable amid solid economic growth.

All 11 economists polled saw no change to Bank Negara Malaysia's (BNM) key rate, which has been maintained at 3.0 per cent after a 25-basis-point cut in July 2016.

Economists were split on whether the central bank would raise or maintain rates next year.

Singapore-based bank DBS said in a research note that Bank Negara would likely stay its hand until the second half of 2018, as it waits to see how economic growth pans out and whether there would be increased inflationary pressures at home.

DBS said a combination of "buoyant economic growth, stimulant effects from the expansionary fiscal policy, a pre-election spike in consumption, and a build-up in domestic inflationary pressure" could push BNM to raise its key rate by 50 basis points later next year.

Two weeks ago, Prime Minister Najib Razak tabled a populist 2018 budget, announcing billions of ringgit in targetted aid packages to shore up support in key vote banks for his ruling Barisan Nasional (BN) coalition ahead of national polls that must be held by August.

Malaysia's economy, Southeast Asia's third largest, is in a significantly stronger position now than a year ago, aided by higher oil prices and solid global demand for its exports.

The economy is seen expanding by 5.2-5.7 per cent this year according to government estimates, up from the initial forecast of 4.3-4.8 per cent.

Better growth figures will give BNM some policy space to raise its interest rates, but it will hinge on whether inflation becomes increasingly demand-driven, said Mohd Afzanizam Abdul Rashid, chief economist for Bank Islam.

Annual headline inflation was at 4.3 per cent in September, accelerating for a second straight month after it dipped to 3.2 per cent in July but still lower than in March, when it hit an eight-year high of 5.1 per cent.

The central bank expects full-year inflation to be in the 3-4 per cent range.

"As it is now, (inflation) is definitely being driven by input costs and foreign exchange rates. I suppose there is some push from demand, but it's not so apparent yet...it's really a story for 2018," Mohd Afzanizam said.

Malaysia's ringgit has strengthened more than 6 per cent against the dollar so far this year after it hit a 19-year low of 4.4980 on Jan 4.

REUTERS