Malaysia May Lower Rate Second Time Running as Inflation Cools

By Stephanie Phang and Michael Munoz

Jan. 21 (Bloomberg) -- Malaysia’s central bank may lower its benchmark interest rate for a second straight meeting as easing inflation allows it to focus on sustaining economic growth amid the deepening global recession.

Bank Negara Malaysia may reduce its overnight policy rate by half of a percentage point to 2.75 percent today, according to 12 of 19 economists surveyed by Bloomberg News. The other seven expected a quarter-point cut in the decision due at 6 p.m.

Malaysia’s 2009 growth will probably miss the government’s 3.5 percent forecast, adding pressure on policy makers to boost spending and lower borrowing costs, the Malaysian Institute of Economic Research said last week. Exports have fallen as demand for electronics and commodities slumps, prompting Citigroup Inc. to predict a recession this quarter.

“Fears of a recession are very real and it is likely that the central bank will move aggressively if the situation turns dour,” said Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney. “The outlook for inflation gives Bank Negara plenty of room to move.”

Malaysia’s inflation rate probably fell to a seven-month low of 5 percent in December, according to the median forecast of 15 economists in a Bloomberg News survey. The government will release consumer-price data at 5 p.m. today.

Malaysia’s government, which subsidizes retail fuel prices to keep them below market rates, cut gasoline prices seven times since late August as crude oil costs fell. The state-controlled power company may reduce electricity prices next month, the Star newspaper reported Jan. 16, citing people it didn’t identify.

‘Pre-Emptive’

Malaysia’s central bank, which avoided raising interest rates earlier last year when others were doing so to tame inflation, joined nations around the world in lowering borrowing costs in November. The quarter-point cut on Nov. 24 was the first since 2003 and accompanied a reduction in the amount lenders need to set aside as reserves.

The last rate cut was “a pre-emptive measure,” Bank Negara said then, citing signs that Malaysia’s labor market was weakening and business activity was slowing. Sustaining domestic demand was crucial to ensure growth in 2009, it said.

The global economic slump is hurting orders at the Malaysian factories of companies such as Dell Inc. and Intel Corp., causing overseas shipments to fall the most in almost seven years in November.

The government is planning a second economic stimulus package, in addition to the 7 billion ringgit ($2 billion) spending plan unveiled in November, Finance Minister Najib Razak said yesterday.

Malaysia’s 2009 economic growth may slow to an eight-year low of 2.5 percent should the government fail to effectively implement the November package, the Business Times reported Jan. 16, citing Sulaiman Mahbob, director-general of the Economic Planning Unit.

Central banks from India to Taiwan also lowered borrowing costs in recent months to spur growth as the U.S., Japan and the euro region slipped into recessions.

To contact the reporter on this story: Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net