Published May 27, 2009

Malaysia central bank holds rates steady at 2%

It says measures to raise financing access are enough to support demand

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(KUALA LUMPUR) Malaysia's central bank refrained from cutting interest rates for a second straight meeting, betting that the economy will improve after contracting last quarter for the first time since 2001.

Looking up: Latest global economic indicators suggest the potential for a gradual improvement in later 2009

Bank Negara Malaysia kept its overnight policy rate unchanged at 2 per cent, it said in a statement in Kuala Lumpur yesterday. The decision was predicted by all 20 economists surveyed by Bloomberg News.

'A more modest pace of decline in the latest indicators of global economic activity suggest the potential for a gradual improvement in the second half of the year,' the central bank said. 'The current assessment is that the accumulated monetary policy initiatives and measures to enhance access to financing are sufficient to provide support to domestic demand.'

Asian policymakers, who have slashed borrowing costs and pledged more than US$950 billion of stimulus plans, have started saying that their economies may be past the worst of the deepest worldwide recession since the Great Depression.

'Signs of the global economy stabilising in recent months, after earlier plunges in activity, are mitigating the need for further interest-rate cuts,' said Suhaimi Ilias, an economist at Maybank Investment Bank in Kuala Lumpur. 'More central banks have stopped reducing rates.'

Malaysia's 1.5 percentage points of interest-rate cuts since late November and the government's RM67 billion (S$27.8 billion) of public spending, loan guarantees and other measures should help the economy resume growth in the second half after a contraction in the first six months, Governor Zeti Akhtar Aziz said on May 9.

The central bank may report today that gross domestic product shrank 3.9 per cent in the first quarter from a year earlier, according to the median estimate of 16 economists.

'The domestic economy continues to be adversely affected by the significant contraction in external demand, resulting in steep declines in exports and industrial production,' Bank Negara said yesterday. 'This has resulted in a marked contraction in the Malaysian economy in the first quarter of 2009. These conditions have continued into the second quarter.'

Malaysia's ringgit has strengthened 2 per cent since Bank Negara first held rates steady on April 29.

Still, a worse-than-expected slump in exports early this year will force policy makers to lower the country's full-year economic forecast, Ms Zeti said earlier this month. The central bank currently predicts a contraction of one per cent or growth of that much.

'The deterioration in the world economy during the first quarter was worse than expected as the global financial turmoil became more prolonged,' Bank Negara said. 'The full effect of these global developments is being felt by the regional economies during the first half of 2009.'

South-east Asia's third-largest economy will 'definitely' shrink more than one per cent this year, Second Finance Minister Ahmad Husni Mohamad Hanadzlah said yesterday.