Malaysia maintains key interest rate at 3pc

KUALA LUMPUR: As anticipated, Bank Negara Malaysia continued to pause on the borrowing costs, saying it is appropriate given the outlook for inflation and economic growth.

In its decision to maintain the Overnight Policy Rate (OPR) at three per cent, the monetary policy committee said although inflation is expected to rise during the year, it will remain modest.

Higher global prices of selected food commodities and domestic factors are expected to increase costs and contribute to higher prices but Bank Negara said the pressures from global commodity prices are also "expected to be contained".

It said the robust investment activity and expansion in private consumption will continue as the latter is supported by sustained income growth and stable labour market conditions.

"Investment is being led by capital spending in the domestic-oriented sectors, the oil and gas industry and the ongoing implementation of infrastructure projects.

"The external sector is also expected to improve and provide additional support to the economy."

CIMB Investment Bank chief economist Lee Heng Guie expects the current accommodative stance to remain in the first half of the year.

"The decision to maintain the current monetary stance underscores a delicate balance between supporting steady growth and managing spillover from very easy global monetary conditions," he said.

However, there is an even chance of rate normalisation if the economic conditions are conducive, he added.

Maybank FX Research commented that unlike Indonesia, there is little pressure on Malaysian central bank to adjust the policy rate at the moment, given robust economic growth and benign inflation.

Bank of Japan and Bank of Indonesia kept their rates steady yesterday.

"We expect inflation to pick up after the elections (which must be held by end of the first half) as the government is expected to reinstate its subsidy rationalisation programme. The economy is expected to grow above its potential of four per cent to five per cent this year and this, too, will add to inflationary pressures."

Any bias towards a rate hike is likely in the fourth quarter, raising the OPR to 3.25 per cent.

"Unlike the Indonesian rupiah, we do not expect to see any adverse reaction to the announcement for the ringgit as external events (like dollar strength) and domestic concerns (armed conflict in Sabah and elections concerns) continue to be the likely drivers of the US$/RM pair."

The ringgit closed higher at 3.108 from 3.1048 on the back of the greenback's strength. Maybank expects the ringgit to strengthen to RM2.98 by year-end.

Meanwhile, Bank Negara said while global financial markets have broadly improved, markets remain vulnerable to setbacks and changes in sentiments. Rupa Damodaran