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Nikkei Markets

Malaysia holds policy rate steady, flags downside risk

Global trade tension risks hurting investment, consumption

Bank Negara Malaysia reiterats that the Malaysian economy is expected to remain on a steady growth path.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysia's central bank Wednesday kept the benchmark policy interest rate unchanged as anticipated but cautioned of downside risks to its outlook amid global trade tensions.

Bank Negara Malaysia's monetary policy committee held the Overnight Policy Rate at 3.25% at the fourth of this year's six scheduled meetings, the central bank said in a statement. BNM had raised its key interest rate by 25 basis points in January.

"The balance of risks to the outlook has tilted to the downside," BNM said. "The intensification of global trade tensions could affect sentiments and weigh on trade, investment and consumption."

The rate decision, the first under Governor Nor Shamsiah Mohd Yunus, comes at a time of mounting trade strain between the U.S. and China, both of which are major trading partners of Malaysia.

It was also the second monetary policy review since May 9's surprise election verdict that swept the nonagenarian Mahathir Mohamad back to power. Last month BNM Governor Muhammad Ibrahim quit after completing less than half of his five-year term as the central bank's governor.

Economists said BNM's less-than-optimistic outlook on economic growth suggests that policy rate of the trade-reliant Southeast Asian nation will likely remain unchanged for the rest of 2018.

"Overall, BNM's statement indicates that the monetary policy stance is rather neutral at this point and it is likely to adopt a wait-and-see approach," said RHB Research Institute's Economist Vincent Loo.

Despite the external concerns, BNM reiterated that the Malaysian economy is expected to remain on a steady growth path, noting boost from higher household spending and capacity expansion mostly in the export-oriented industries.

Further, headline inflation is expected to be lower than initial projection and may even turn negative in some months following recent policy measures to cut domestic costs, BNM said. Still, the impact is likely transitory and inflation is likely to remain low in the first half of 2019 before picking up, the central bank said.

"At the current level of the OPR, the degree of monetary accommodativeness is consistent with the intended policy stance," BNM said.

The central bank also noted that the ringgit exchange rate would be more reflective of the underlying fundamentals of the economy when the external and domestic uncertainties recede, suggesting that the change of government had clouded policy clarity in the near-term.

"While the risks now lie more towards looser policy, we are not forecasting rate cuts either," said Capital Economics Analyst Alex Holmes. "We continue to expect rates to stay on hold at 3.25% both this year and next."

--Jason Ng

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