Malaysia Refrains From Rate Increase to Spur Recovery

By Stephanie Phang

Oct. 29 (Bloomberg) -- Malaysia’s central bank refrained from raising interest rates, opting to keep borrowing costs at a record low to support a nascent economic recovery as the government prepares to cut spending to trim its budget deficit.

Bank Negara Malaysia maintained its overnight policy rate at 2 percent for a fifth straight meeting yesterday, it said in a statement in Kuala Lumpur. The decision was predicted by all 21 economists surveyed by Bloomberg News. The benchmark is at its lowest level since it was introduced in April 2004.

“The international economic and financial conditions have improved further,” the central bank said. “Notwithstanding these improvements, the outlook for the global economy continues to be uncertain, with recovery likely to be slow and uneven in view of the ongoing adjustments.”

Asian policy makers from India to South Korea have begun to signal they may be prepared to raise interest rates as inflation returns with economic recovery. Malaysia has less reason to follow Australia’s Oct. 6 move to increase borrowing costs anytime soon because consumer prices are declining and the nation is still in a recession, economists say.

“Malaysia could be amongst the last to raise rates in Asia,” said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. who expects Bank Negara to increase borrowing costs in the fourth quarter of next year. “With policy needing to stay accommodative to offset the fiscal tightening implied by a smaller deficit, the risk is that rates are kept low for longer.”

Policy ‘Appropriate’

The central bank said yesterday its current monetary policy stance is “appropriate” to support growth because price pressures should remain “contained” as the economy improves.

The ringgit fell for a third day to 3.4450 a dollar as at 9:01 a.m. today, its lowest level in more than three weeks, and Malaysia’s benchmark stock index slid a second day as concern a global economic recovery is faltering hurt demand for emerging- market assets. Confidence among U.S. consumers declined for a second month in October, a report showed earlier this week.

“Bank Negara still views growth concerns as the greater risk to macroeconomic stability,” said Matt Hildebrandt, an economist at JPMorgan Chase & Co. in Singapore. Inflation is “muted” and “uncertainties about the growth outlook are still high,” he said.

The government expects Malaysia’s $195 billion economy to expand between 2 percent and 3 percent in 2010 after shrinking 3 percent this year, helped by a recovery in demand for Malaysian Pacific Industries Bhd. semiconductors, IOI Corp. palm oil and other exports.

Budget Deficit

Prime Minister Najib Razak plans to narrow the budget shortfall to 5.6 percent of gross domestic product next year, reducing spending after stimulus measures to revive economic growth pushed the deficit to a 22-year high of 7.4 percent of GDP in 2009.

Malaysia will probably lag behind South Korea and India in raising interest rates because the Southeast Asian nation’s economic recovery isn’t as strong as the other two countries’, said Vishnu Varathan, an economist at Forecast Singapore Pte.

India’s central bank, which expects Asia’s third-largest economy to expand 6 percent in the year through March 31, on Oct. 27 ordered lenders to keep more cash in government bonds as it raised its inflation forecast. The move followed Australia’s decision on Oct. 6 to raise its benchmark rate to 3.25 percent from a 49-year low of 3 percent.

South Korea, India

South Korea’s economy expanded 2.9 percent in the third quarter from three months earlier, the fastest pace in seven years, and Bank of Korea Governor Lee Seong Tae said Oct. 23 that keeping rates at a record low may not be healthy.

Malaysia’s economy, Southeast Asia’s third largest, shrank in the first two quarters of this year and the government doesn’t expect growth to resume until the final three months. Neighboring Singapore emerged from its recession in the second quarter and Indonesia and the Philippines have avoided economic contraction altogether.

Governor Zeti Akhtar Aziz refrained from following other policy makers in raising interest rates last year when Malaysia’s inflation surged to as high as 8.5 percent amid soaring commodity costs, predicting that price gains would ease as world economic growth slowed.

Consumer prices in Malaysia fell for a fourth straight month in September. The decline is expected to be “temporary,” the central bank said yesterday.

‘Subdued’ Inflation

“Excluding further unanticipated price adjustments and external influences, inflation in 2010 is projected to be positive but remain subdued,” Bank Negara said.

Interest-rate swaps signal the market is pricing in an eventual increase in borrowing costs in Malaysia in the second half of 2010, according to DBS Group Holdings Ltd., which cited the widening difference in yield, or spread, between the one- year swap rate and the Kuala Lumpur three-month interbank offered rate, or the Klibor.

The one-year swap rate of 2.44 percent offered 28 basis points more than Klibor yesterday from 10 basis points on April 29, when Bank Negara ended its interest-rate cuts, according to data compiled by Bloomberg.

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