Wednesday, January 29, 2014

Malaysia holds rate steady, sees higher inflation

    Malaysia's central bank held its benchmark Overnight Policy Rate (OPR) steady at 3.0 percent, as expected, and said the momentum in economic growth was expected to continue this year while inflation was expected to be higher than last year.
    Bank Negara Malaysia (BNM), which has maintained rates at this level since May 2011, also said global growth would be supported by emerging economies and the recovery in advanced economies but that "global economic and financial conditions remain vulnerable to shifts in sentiments and heightened volatility in the international financial markets."
    Like many other emerging market currencies, Malaysia's ringgit has weakened in the last year, though much less than for example India's rupee and Turkey's lira. In 2013 the ringgit lost around 7 percent against the U.S. dollar as the U.S. Federal Reserve signaled it was preparing to wind up asset purchases. Since the start of this year, the ringgit has depreciated a further 1.8 percent, trading at 3.34 to the dollar today.
    Malaysia's inflation rate rose to 3.2 percent in December, a high for the year and continuing the acceleration seen since December 2012 when inflation was 1.2 percent.

    In 2013 Malaysia's inflation averaged 2.1 percent with prices rising due to disruptions in supply following adverse weather and higher domestic costs due to the government's cut in fuel subsidies in September that raised the price of certain gasolines and diesel fuel.
    "Going forward, inflation is expected to average higher largely due to domestic cost factors," the central bank said, adding that moderate domestic demand and subdued external prices should help contain the impact on underlying inflation.
    Malaysia's central bank has often said it expects inflation to rise this year and may even exceed the long-term average of 3.2 percent, partly due to the earlier cut in subsidies and coming changes to taxes in April. Economists are expecting the central bank to raise rates later this year to contain the growing inflationary pressures.
    "The MPC remains focused on ensuring medium-term price stability that would contribute to sustainable economic growth," the central bank said.
    Malaysia's Gross Domestic Product rose by 1.7 percent in the third quarter from the second quarter for annual growth of 5 percent, up from 4.4 percent in the previous quarter, and the central bank said it expects sustained performance in the fourth quarter as better exports and supported growth while domestic demand has remained firm.
    "Going forward, the growth momentum is expected to continue in 2014, amid better performance in the external sector," the central bank said, adding that investment activity is projected to remain robust while domestic demand is expected to moderated due to the continuing fiscal consolidation and slower growth in private consumption.


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