Malaysia Holds Rate, Vows Action to Support Economy

By Shamim Adam

Oct. 25 (Bloomberg) -- Malaysia's central bank pledged it will take action to prevent the economy from deteriorating after keeping the benchmark interest rate unchanged for the 20th straight meeting.

``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 Malaysia said yesterday, after maintaining the overnight policy rate at 3.5 percent.

The decision contrasts with cuts by central banks in China, India and Australia, which have lowered borrowing costs in recent weeks to spur growth amid a looming global recession. Malaysia's inflation has started to ease from a 26-year high and that may give the central bank room to reduce interest rates should the economy slump.

``Bank Negara will look to ease policy, possibly as soon as the next meeting, especially if the growth risks become clearer and inflation risks diminish,'' said Mark Tan, an economist at Goldman Sachs Group Inc. in Hong Kong. ``The main factor that will influence future rate decisions would be how fast they expect the growth outlook to unravel.''

Earlier this year, the central bank had held off from raising rates to cool inflation as challenges to Prime Minister Abdullah Ahmad Badawi's leadership threatened to hurt consumer confidence and economic growth. Opposition Leader Anwar Ibrahim, who had said he wanted to topple the government by September, said this week that goal is now harder to achieve.

Inflation Peaks

The Malaysian ringgit is the fifth worst performer among 10 Asian currencies, according to Bloomberg data. It has fallen 7.5 percent against the U.S. dollar this year, compared with a 6.7 percent gain by the Chinese renminbi and a 34 percent plunge by the South Korean won.

The central bank said yesterday inflation has peaked and risks to global growth have increased ``significantly.'' Consumer-price gains slowed to 8.2 percent last month from 8.5 percent in August.

Bank Negara expects inflation to slow to below 4 percent before the second half of 2009, Governor Zeti Akhtar Aziz said last week. The government cut gasoline prices three times since late August as crude oil fell from a record in July.

``An increasing number of indicators now signal an easing of inflationary pressures,'' the central bank said yesterday. ``Lower cost pressures and moderating domestic demand are expected to reduce inflation in 2009.''

Global Crisis

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.

During the 1997 Asian financial crisis, Malaysia rejected IMF money, opposing conditions on government policies that came with such loans. Malaysia imposed restrictions on foreign exchange movements in September 1998, trapping about $10 billion in foreign investment in the country, and pegged the ringgit at 3.8 to the U.S. dollar.

``The greater focus of policy makers is now toward restoring the functioning of the international financial markets and toward avoiding a sharp global economic downturn,'' Bank Negara said.

Growth Forecast

Malaysia will cut its 2009 economic-growth forecast on Nov. 4, from the current estimate of 5.4 percent, Finance Minister Najib Razak said this week.

``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.

Other central banks have already cut interest rates. 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.

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