Malaysia May Refrain From Raising Interest Rate as Growth Slows

By Stephanie Phang

Aug. 25 (Bloomberg) -- Malaysia's central bank may keep its benchmark interest rate unchanged today to avoid exacerbating an economic slowdown, refraining from joining its neighbors who have increased borrowing costs to fight inflation.

Bank Negara Malaysia will maintain its overnight policy rate at 3.5 percent for a 19th straight meeting, according to 8 of the 12 economists surveyed by Bloomberg News last week before the release of July inflation figures. The other four expect an increase to 3.75 percent. The decision is due at 6:00 p.m. in Kuala Lumpur.

Malaysia has avoided following Thailand, Indonesia, India, Vietnam and the Philippines in raising borrowing costs this year as a deepening global slowdown threatens Asian growth. Central Bank Governor Zeti Akhtar Aziz has said she expects commodity prices, which drove inflation to a 26-year high last month, to ease next year as expansion cools around the world.

``Although we believe the economic case for modest rate hikes remains intact, policymakers appear to think the growth slowdown will in itself take care of inflation,'' said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore. ``Given the difficult political backdrop, it is unlikely the government would appreciate a rate increase that will only add to the woes of households.''

Voter anger over rising prices contributed to opposition gains in March elections that deprived Prime Minister Abdullah Ahmad Badawi's of his two-thirds majority in parliament. Former deputy premier Anwar Ibrahim will run for a seat in a by- election tomorrow in a bid to return to the legislature for the first time in a decade and oust the government.

Seize Power

Anwar, now the leader of an alliance of opposition parties, has said he plans to lure enough lawmakers from the ruling coalition to form a new government next month. He has promised to reduce fuel prices should he seize power.

Bank Negara, which hasn't raised borrowing costs since April 2006, unexpectedly refrained from increasing the overnight policy rate last month, saying its immediate concern is to avoid a ``fundamental economic slowdown'' even as it raised this year's inflation forecast to between 5.5 percent and 6 percent. Slowing growth will cause inflation to ease in the second half of 2009, the central bank said.

Malaysia's inflation accelerated to 8.5 percent in July after the government increased retail gasoline prices 41 percent and diesel rates 63 percent in June to prevent subsidies that keep pump costs artificially low from spiraling amid soaring oil prices. Electricity rates also rose in July.

Tightening Bias

The last time Malaysia's inflation was above 6 percent was June 1998, when the central bank's then benchmark three-month intervention rate was 11 percent. Malaysia's overnight policy rate, introduced in April 2004, is the second lowest in Asia outside Japan, together with Hong Kong's and Thailand's.

``While we agree that there are significant concerns on growth in the near term, runaway inflation could make matters worse going forward,'' said Irvin Seah, an economist at DBS Bank Ltd. in Singapore. ``It could potentially undermine the longer- term growth potential of the economy. We believe that the policy direction is still biased towards tightening.''

Still, expectations for a Malaysian rate increase have eased along with weakening global economic prospects since last month, when more than half of the 20 economists surveyed by Bloomberg News had expected the central bank to raise borrowing costs at its July 25 meeting.

Neighboring Singapore cut its 2008 growth forecast for a second time this year in August, joining other nations in Asia signaling a deeper slowdown. Malaysia's economic expansion probably slowed in the second quarter, a Bloomberg survey of economists shows ahead of an Aug. 29 central bank release.

U.S. Slowdown

The effect of a U.S. housing slump last year that sparked about $500 billion in credit-market losses for banks globally is spreading as rising borrowing costs combine with record commodity prices to sap growth in the world's largest economies. The U.S. is close to a recession and Japan contracted in the second quarter.

Economists at Goldman Sachs Group Inc. said last week countries that account for half of the world economy face recession, and those at JPMorgan Chase & Co. estimate a global expansion of 1 percent this quarter, the weakest in seven years.

The following table gives economist forecasts for Malaysia's benchmark interest rate:

Malaysia Overnight Policy Rate Estimates
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Policy Meeting         Aug.   Oct.   Nov.
Dates                    25     24     24
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Median                 3.50%  3.50%  3.50%
% forecasts at Median    67%    56%    44%
High                   3.75%  4.00%  4.00%
Low                    3.50%  3.50%  3.25%
Number of Estimates       12      9      9
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Action Economics       3.75%  3.75%  4.00%
Aseambankers           3.50%  3.50%  3.50%
Bank Islam Malaysia    3.50%  3.50%  3.50%
Barclays Capital       3.50%  3.50%  3.50%
Citi                   3.50%     --     --
Credit Suisse          3.50%  3.50%  3.50%
DBS Group              3.75%  4.00%  4.00%
Kenanga Investment     3.75%  4.00%  4.00%
Reuters IFR            3.75%  3.75%  4.00%
Standard Chartered     3.50%     --     --
Sumitomo Mitsui        3.50%  3.50%  3.25%
Westpac Banking        3.50%     --     --
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To contact the reporter on this story: Stephanie Phang in Singapore at sphang@bloomberg.net