Malaysia Holds Interest Rate Steady for 20th Straight Meeting

By Shamim Adam

Oct. 24 (Bloomberg) -- Malaysia's central bank kept its benchmark interest rate unchanged even as inflation slows and growth concerns mount, betting that borrowing costs are low enough to spur the economy.

Bank Negara Malaysia maintained its overnight policy rate at 3.5 percent for a 20th straight meeting today, it said in a statement in Kuala Lumpur. The decision was predicted by 13 of the 14 economists surveyed by Bloomberg News.

``Malaysia did not raise interest rates earlier on when its regional counterparts had done so and that gives them time to retain their policy,'' said Wan Suhaimi Saidi, an economist at Kenanga Investment Bank Bhd. in Kuala Lumpur. ``For the time being, the economy is not weak enough to warrant a rate cut. They will be cautious in cutting rates because it will affect the currency.''

The central bank held off from raising rates this year even as inflation accelerated to a 26-year high and its neighbors tightened policy, arguing it was focused on staving off a growth slowdown. The decision to keep rates steady gives it room now to delay any action at a time when policy makers in China, India and Australia are cutting borrowing costs.

Still, ``in the face of diminishing inflationary pressures, and in the event of heightened downside risks to growth, the bank will take swift monetary policy action to provide support to the economy,'' Bank Negara said.

Inflation in Malaysia has eased as oil and commodity prices fell. Consumer prices rose 8.2 percent in September from a year earlier, easing from a rate of 8.5 percent in August, according to data released today.

Gasoline Prices

The government has cut gasoline prices three times since late August as crude oil fell from a record $147.27 a barrel on July 11. Fuel prices are expected to drop further, Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad said today, adding that he doesn't foresee an increase in transportation costs while some food items will be cheaper.

Bank Negara expects inflation to slow to below 4 percent before the second half of 2009, Governor Zeti Akhtar Aziz said last week.

``The assessment is that inflation has now peaked and is expected to moderate into 2009,'' the central bank said in its statement today. ``An increasing number of indicators now signal an easing of inflationary pressures. Lower cost pressures and moderating domestic demand are expected to reduce inflation in 2009.''

Central banks around the world are shifting their focus to supporting growth from damping inflation as the global credit crisis escalates. The turmoil has led to the collapse of banks and forced some countries to approach the International Monetary Fund for loans, while more nations are reporting a contraction in their economies, increasing the risk of a world recession.

Sharp Downturn

``The greater focus of policy makers is now towards restoring the functioning of the international financial markets and towards avoiding a sharp global economic downturn,'' Bank Negara said. ``While the downside risks to global growth have increased significantly, concerns about inflation have subsided as commodity and energy prices declined, and as slower growth sets in.''

In Malaysia, the economy may expand 5 percent this year, lower than the government's August forecast of 5.7 percent growth, Finance Minister Najib Razak said in an interview yesterday.

``The slower global growth and the decline in commodity prices will affect the performance of the export sector and consequently, the overall economic growth in 2009,'' the central bank said.

Malaysia will cut its 2009 economic-growth forecast on Nov. 4, from the current estimate of 5.4 percent, Najib said earlier this week. Bank Negara's Zeti last week predicted growth may be little as 4 percent in 2009 and said policy makers have the capacity and the capability to implement ``fiscal, monetary and other measures'' to prevent such an economic downturn.

Other central banks aren't waiting. The Reserve Bank of India lowered its benchmark by 1 percentage point on Oct. 20, while China has cut borrowing costs twice in the past six weeks.

In Thailand, central bank Governor Tarisa Watanagase today said the monetary authority has room to ease interest rates to counter slower economic growth after raising borrowing costs in July and August.

To contact the reporter on this story: Shamim Adam in Singapore sadam2@bloomberg.net