Thursday, November 7, 2013

Malaysia holds rate steady, sees inflation edging up

    Malaysia's central bank maintained its Overnight Policy Rate (OPR) at 3.0 percent, as expected, and repeated that risks still surround the outlook for economic growth and inflation and it would continue to carefully assess the implications of these risks.
    The Central Bank of Malaysia, which has held its rate steady since June 2011, also said inflation was expected to edge up due to domestic cost factors but the overall outlook for inflation was tempered by "a stable external price environment, moderate domestic demand pressures, expansion in domestic capacity and improvements in food production and distribution."
    Malaysia's inflation rate jumped to 2.6 percent in September from 1.9 percent in August, mainly due to higher petrol prices, and was at the highest level in 20 months. But for the first nine months of the year, the average inflation rate was 1.8 percent, 
    At its previous meeting in September, the central bank said that it expected inflation to continue to rise this year and into 2014 due to domestic factors, such as subsidy adjustments.

    In September Malaysia's government cut fuel subsidies, raising the price of certain gasolines and diesel fuel, boosting expectations that the central bank could raise rates early next year to push back inflation. Today's meeting was the last meeting by the bank's policy committee this year.
    The central bank said the global economy was continuing to improve at a moderate pace, with recovery "gradual and uneven" in advanced economies while growth in Asia has been sustained by better exports amid moderating domestic economic activity.
    "Although volatility in the global financial markets has receded, markets remain vulnerable to setbacks and changes in sentiment," the bank said, adding that there remain considerable risks that could affect the pace of the global recovery.
    The central bank did not make any reference to currencies in its statement.
    Along with many other emerging market currencies, Malaysia's ringgit fell in early May as global investors started to prepare for a wind-down of asset purchases by the U.S. Federal Reserve. 
    The ringgit weakened through early September but then strengthened as the Federal Reserve delayed tapering its asset purchases and over the last month it has been largely steady, trading at 3.18 to the U.S. dollar today, down from 3.06 at the end of 2012 for decline of some 4 percent, much less than the drop seen in the currencies of Indonesia, India and Brazil.
    The central bank said domestic activity was supported by better exports and private consumption and investment activity continued to sustain domestic demand amid slower public spending.
    "Going forward, the growth momentum will benefit from the expected improvement in the external sector amid some moderation in domestic demand," the bank said.
     Malaysia's Gross Domestic Product rose by 1.4 percent in the second quarter from the first for annual growth of 4.3 percent, up from 4.1 percent in the first quarter.
    In August the central bank cut its 2013 growth forecast to between 4.5 and 5.0 percent from a previous forecast of 5-6 percent. Last month Malaysia's government forecast growth of 5.0-5.5 percent in 2014 while the fiscal deficit was projected to shrink to 3.5 percent of GDP from 4.0 percent this year.


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