By Stephanie Phang and Michael Munoz
May 27 (Bloomberg) -- Malaysia’s central bank refrained from cutting interest rates for a second straight meeting, betting the economy will improve after contracting last quarter for the first time since 2001.
Bank Negara Malaysia kept its overnight policy rate unchanged at 2 percent, it said in a statement in Kuala Lumpur yesterday. The decision was predicted by all 20 economists surveyed by Bloomberg News.
“A more modest pace of decline in the latest indicators of global economic activity suggest the potential for a gradual improvement in the second half of the year,” the central bank said. “The current assessment is that the accumulated monetary policy initiatives and measures to enhance access to financing are sufficient to provide support to domestic demand.”
Asian policy makers, who have slashed borrowing costs and pledged more than $950 billion of stimulus plans, have started saying their economies may be past the worst of the deepest worldwide recession since the Great Depression. Bank of Japan Governor Masaaki Shirakawa said last week the region’s largest economy is improving after a record first-quarter contraction.
“Signs of the global economy stabilizing in recent months, after earlier plunges in activity, are mitigating the need for further interest-rate cuts,” said Suhaimi Ilias, an economist at Maybank Investment Bank Bhd. in Kuala Lumpur. “More central banks have stopped reducing rates.”
The Bank of Thailand unexpectedly kept interest rates on hold last week and South Korea has left borrowing costs unchanged for three months.
‘Marked Contraction’
Malaysia’s 1.5 percentage points of interest-rate cuts since late November and the government’s 67 billion ringgit ($19 billion) of public spending, loan guarantees and other measures should help the economy resume growth in the second half after a contraction in the first six months, Governor Zeti Akhtar Aziz said May 9.
The central bank may report today that gross domestic product shrank 3.9 percent in the first quarter from a year earlier, according to the median estimate of 16 economists.
“The domestic economy continues to be adversely affected by the significant contraction in external demand, resulting in steep declines in exports and industrial production,” Bank Negara said yesterday. “This has resulted in a marked contraction in the Malaysian economy in the first quarter of 2009. These conditions have continued into the second quarter.”
Zeti refrained from lowering Malaysia’s benchmark interest rate for a second time after cutting it for three consecutive meetings from Nov. 24 to Feb. 24.
Stimulus Plans
Prime Minister Najib Razak, whose coalition has lost three of four regional elections this year, has unveiled two stimulus plans to spur growth as exports such as Intel Corp. computer chips and IOI Corp. palm oil tumbled.
Singapore’s government said last week the economy shrank less than initially estimated in the first quarter and the nation may have “hit the bottom” of its worst recession since independence in 1965. The island’s industrial production declined 0.5 percent last month, the smallest drop in seven months, a report showed yesterday.
The “stabilization in the external environment is also supported by the accelerated implementation of fiscal measures, the further moderation in inflation and continued access to financing, thereby increasing the prospects for a resumption of growth in the Malaysian economy,” Malaysia’s central bank said. “With sizeable and sufficient liquidity in the system, continued emphasis will be given to ensure an adequate flow of credit to all segments of the economy.”
Malaysia’s ringgit has strengthened about 2 percent since Bank Negara first held rates steady on April 29.
2009 Estimate
Still, a worse-than-expected slump in exports will force policy makers to cut the country’s full-year economic forecast, Zeti said earlier this month. The central bank currently predicts a contraction of 1 percent or growth of that much.
“The deterioration in the world economy during the first quarter was worse than expected as the global financial turmoil became more prolonged,” Bank Negara said yesterday. “The full effect of these global developments is being felt by the regional economies during the first half of 2009.”
Southeast Asia’s third-largest economy will “definitely” shrink more than 1 percent in 2009, Second Finance Minister Ahmad Husni Mohamad Hanadzlah said yesterday.
“We believe this reflects a technical adjustment to the weaker-than-expected first-quarter numbers,” said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. “Recent signs of bottoming as seen in trade and production figures coupled with low inflation rates will give Bank Negara greater confidence to stand pat on further monetary or fiscal easing.”
‘Frustrating Time’
Inflation slowed to a one-year low of 3 percent in April as transport and communications costs fell amid slowing growth.
Economic growth may yet miss policy makers’ expectations this year, said Sean Callow, a Sydney-based currency strategist at Westpac Banking Corp.
The second half of 2009 may be “a frustrating time for many policy makers globally as they discover that the recovery is faltering and weak, meaning that what they hoped was the low in policy rates turned out to not quite be low enough,” he said.
To contact the reporter on this story: Stephanie Phang in Singapore at sphang@bloomberg.net
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