Malaysia interest rates seen on hold for now as inflation mild

PHOTO: Malaysia interest rates seen on hold for now as inflation mild

KUALA LUMPUR - Malaysia's central bank is expected to keep its policy rate unchanged for a 10th consecutive time on Thursday, with the earliest rate hike possibly taking place only in the second half of the year as the current benign inflation level likely picks up.

All 18 economists polled by Reuters expect Bank Negara to hold the overnight policy rate (OPR) at 3.00 per cent, the same level it has been at since May 2011, at its first meeting of the year.

A separate Reuters quarterly poll for Asia released last week showed economists unanimously predicting that rates will remain on hold for the first six months of the year, with the earliest move expected only in the third quarter with three out of 12 economists penciling in a 25 basis point (bps) increase .

"The risk of a more hawkish monetary policy committee (MPC) would rise as we head towards the second half of 2013 when the growth recovery becomes more entrenched and inflation likely breaches the 2 per cent level," said Citi economist Kit Wei Zheng.

Economists said the central bank will likely keep rates on hold at its Thursday meeting as it views the current level as accommodative and supportive of economic growth. The trade-dependent nation's economy is expected to remain largely resilient as robust domestic consumption offsets sluggish exports amid weak global demand.

GDP growth was a surprisingly strong 5.2 per cent in the third quarter from a year earlier and a 4.5-5.0 per cent expansion is expected for the full-year 2012. The official 2013 growth forecast is 4.5 to 5.5 per cent.

HSBC said in its outlook this week that inflation will probably pick-up as the economy improves on the back of a recovery in external demand.

"The favourable growth-inflation mix does not warrant any policy move for now, in our view. Consumer confidence stands at a two-year high, while inflation is at a two-year low," HSBC said in the report.

The consumer price index (CPI), used to measure inflation in Malaysia, rose 1.2 per cent in December on year, the lowest rise since February 2010.

Inflation last year thus averaged 1.6 per cent, halving from 3.2 per cent in 2011 as commodity prices and food costs fell. Inflation is forecast to accelerate to 2.5 per cent this year in the quarterly poll.

The introduction of a minimum wage policy and the government plans to cut subsidies as part of efforts to reduce the country's budget deficit, among Asia's biggest, to 4.0 per cent this year from 4.5 per cent in 2012 will also contribute to stronger price pressures, economists said.

Government subsidies on essential items such as cooking oil and sugar have kept inflation in the Southeast Asian country at one of the lowest rates in the region. The plan to gradually roll back subsidies was delayed last year ahead of general elections which must be called by the end of April.

Some economists expect the government to raise fuel and gas prices after the election, which is expected to be intensely fought. The ruling coalition suffered its worst election result in 2008, losing its two-thirds majority in parliament for the first time. The upcoming election is predicted to be even closer, although the coalition is still widely expected to win.

"Price pressure will likely build when the economic growth gains momentum in the second half, and if the government decides to raise fuel and gas prices once every six months according to the plan after the general election," said RHB economist Peck Boon Soon in a note.

Within the region, the Philippines, Indonesia and Thailand held their benchmark policy rates steady recently, saying inflation was manageable and amid expectations growth will remain resilient or strengthen.