Malaysia Refrains From Raising Interest Rate as Rebound Cools

September 02, 2010, 12:01 PM EDT

By Shamim Adam

Sept. 3 (Bloomberg) -- Malaysia’s central bank left interest rates unchanged after three consecutive increases, choosing to support growth as the global recovery slows.

Malaysia started raising interest rates before any other Asian central bank this year to reduce what officials say is the risk of financial imbalances caused by keeping borrowing costs too low for too long. The region’s efforts to withdraw monetary stimulus introduced to counter last year’s global recession may slow as policy makers from the U.S. to Japan take steps to shore up growth amid signs their economies are cooling.

“The second-half outlook is gloomier globally and the strength in the Malaysian economy will be unlike what we saw in the first half,” said Wellian Wiranto, a Singapore-based economist at HSBC Holdings Plc. “It looks like they are done for the year and the question now is whether they are going to keep it unchanged for much of 2011. With Malaysia being one of the first ones to move, 2.75 percent may be what they deem as normal.”

Exports by Malaysian companies such as Sime Darby Bhd. and Unisem (M) Bhd. rose at the slowest pace in eight months in July, a report from the trade ministry showed yesterday.

Exports Cool

Malaysia’s export growth has slowed in recent months along with shipments from other countries in the region, the central bank said. “These conditions are expected to continue with the slowing of global growth,” it said.

Still, Malaysia’s growth will be supported by “robust domestic economic activity” even as the external developments may moderate the pace of expansion, Bank Negara said.

The ringgit is the best performer in Asia excluding Japan in 2010 as the economy strengthened and the central bank raised rates. The currency, which has gained 9.5 percent this year, traded at 3.1275 per dollar at 6:31 p.m. yesterday.

Malaysia’s economy, the largest in Southeast Asia after Indonesia and Thailand, grew near the fastest pace in a decade last quarter, with gross domestic product climbing 8.9 percent from a year earlier. Governor Zeti Akhtar Aziz said last month growth may exceed 6 percent in 2010 even as the expansion in advanced economies may ease in the second half.

Ahead of Curve

“Bank Negara is slightly ahead of the curve compared to its regional peers in normalizing rates,” Lee Heng Guie, chief economist at CIMB Investment Bank in Kuala Lumpur, said before the decision. “More signs of global weakness, in particular growing concerns over a double-dip recession in the U.S., a moderate pace of domestic growth and the fading effects of fiscal stimulus” may prompt Malaysia to pause the rest of the year, he said.

The U.S. economy grew at a 1.6 percent annual pace in the second quarter, less than previously estimated. Japan expanded at the slowest pace in three quarters in the period ended June 30 as global demand cooled and stimulus effects wore off.

Thailand’s Move

Other Asian central banks are still raising rates to curb inflationary pressures as their economies expand. The Bank of Thailand raised its benchmark on Aug. 25 and signaled further increases after the economy overcame political unrest to grow faster than estimated last quarter.

The Reserve Bank of India has boosted its key rate more times than any other Asian counterpart this year to cool consumer prices that are rising at more than 11 percent. The Bank of Korea is alert to inflation and may need to raise interest rates again even with a slower-than-expected global recovery, central bank Governor Kim Choong Soo said last week.

“The Monetary Policy Committee considers the current monetary policy as appropriate and consistent with the latest assessment of the economic growth and inflation prospects,” Malaysia’s central bank said. At the current level of the benchmark rate, “the stance of monetary policy continues to remain accommodative and supportive of economic growth.”

Malaysia’s rate increase in March was the first in almost four years. The overnight policy rate was kept at 3.5 percent from late April 2006 until late November 2008, when the central bank started to cut the benchmark, bringing it to a record-low 2 percent in February 2009.

The central bank’s final policy review of 2010 will be in November.

--With assistance from Michael Munoz in Hong Kong. Editors: Stephanie Phang, Lily Nonomiya

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To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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