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Nikkei Markets

Bank Negara Malaysia holds interest rate steady as expected

Economists flag room for rate cut in November if US-China trade war worsens

Bank Negara Malaysia's monetary policy committee held the Overnight Policy Rate at 3.00% at the fifth of the six scheduled meetings this year.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysia's central bank Thursday kept the benchmark policy interest rate unchanged as expected citing resilient private spending amid broad-based expansion in key economic sectors.

Bank Negara Malaysia's monetary policy committee held the Overnight Policy Rate at 3.00% at the fifth of the six scheduled meetings this year, the central bank said in a statement. The decision was predicted by most economists surveyed by Nikkei Markets.

"Going forward, these domestic drivers of growth, alongside stable labour market and wage growth, are expected to remain supportive of economic activity," BNM said. "Overall, the baseline growth projection for 2019 remains unchanged, within the range of 4.3% - 4.8%."

Economists said benign inflation outlook will provide room for the central bank to ease policy rate at its last scheduled meeting in November if trade tensions escalate and other headwinds strengthen.

"The dovish statement which accompanied today's decision... suggests that the central bank is leaving the door open to further easing," said Capital Economics' Analyst Alex Holmes. "We are sticking with our forecast that the Bank will cut interest rates once more before the end of the year."

Growth of the third-largest Southeast Asian economy has remained relatively robust even as escalating U.S.-China trade tensions weighed on its export-reliant neighbors. Malaysia's economic expansion picked up pace to 4.9% in the April-June period, the fastest in five quarters.

Trade figures released last week showed July exports rebounded 1.7% thanks to strong demand for electrical and electronic products. That segment, which accounts for more than one-third of Malaysia's total exports, rose 4.5% in July from a year earlier.

Policymakers in the country however remain cautious over the lingering trade spat. Finance Minister Lim Guan Eng said last week that the government would keep a close watch on the economy so as to quickly undertake any measure needed to prioritize sustainable economic growth.

On its part, Bank Negara Malaysia flagged downside risks from worsening trade tensions, uncertainties in the global and domestic environment, and extended weakness in commodity-related sectors. Growth of most major advanced and emerging economies are also slowing, it noted.

Meanwhile, headline inflation averaged 0.3% year to date and is projected to edge higher through the remainder months of 2019 and into 2020, BNM said.

Underlying inflation is expected to remain stable supported by the continued expansion in economic activity and in the absence of strong demand pressures, the central bank said. "At current level of OPR, the stance of monetary policy remains accommodative and supportive of economic activity."

Bank Negara Malaysia has stood pat since cutting its key interest rate by 25 basis points, or 0.25 percentage-point in May to perk up economic growth as U.S. and China stepped up their tit-for-tat tariff battle.

"As the outcome to this meeting makes clear, there is uncertainty around the timing of a rate cut," said Barclays Economist Brian Tan. "BNM's focus on the resilience of the domestic economy suggests GDP growth would have to weaken materially before it feels any pressure to act."

--Jason Ng

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