Thursday, September 5, 2013

Malaysia holds rate, cites uncertainties to growth, inflation

    Malaysia's central bank held its overnight policy rate (OPR) steady at 3.0 percent, saying "there are increased uncertainties to the balance of risks surrounding the outlook for domestic growth and inflation" and it would carefully assess developments for their implications for inflation and growth.
    The Central Bank of Malaysia, which has held its rate steady since June 2011, cited the recent volatility in global financial markets and the reversal of capital flows from emerging markets that has resulted in a depreciation of emerging market currencies, including Malaysia's ringgit.
    The ringgit strengthened slowly in the first few months of the year but then fell sharply in early May, along with other emerging market currencies. Although the ringgit is down 7.5 percent against the U.S. dollar this year, trading at 3.31 to the dollar today, this is much less than that of other emerging market currencies, such as those of Indonesia, India and Brazil.
    Last month the central bank's governor, Zeti Akhtar Aziz, said the central bank was not targeting a specific exchange rate but wants to ensure orderly markets. She also said the current level of interest rates were supporting demand.

    The central bank said domestic demand in Malaysia is continuing to support growth amid weak external demand and growth will continue to be underpinned by domestic demand as sustained income growth and stable employment conditions will support private consumption while capital spending and infrastructure projects support investment.
    "Overall growth prospects, however, could be affected by risks in the global economy and international financial markets," the central bank cautioned.
    Malaysia's Gross Domestic Product expanded by 1.4 percent in the second quarter for annual growth of 4.3 percent, up from 4.1 percent in the first quarter but below the average in recent years.
    Last month the central bank cut its forecast for growth this year due to lower global demand to between 4.5 and 5.0 percent this year from previous forecast of 5.0-6.0 percent.
    The central bank said the global economy was continuing to experience modest growth with the strength of the recovery in major advanced economies still to gain momentum. While domestic demand is still supporting growth in emerging economies, the growth momentum has moderated.
    Malaysia's inflation rate rose to 2.0 percent in July, up from 1.8 percent in June and the highest in 16 months. The central bank repeated that it expects inflation to rise during the rest of the year and into 2014 due to domestic cost factors, such as subsidy adjustments.
    "The increase in inflation, however, is from a low level and will be mitigated by a stable external price environment, expansion in domestic capacity and moderate domestic demand pressures," the central bank said.



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