Published July 30, 2009

Malaysia keeps policy rate unchanged at 2%

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(KUALA LUMPUR) Malaysia's central bank held interest rates steady for a third straight meeting amid signs that the global economy is recovering from the worst recession since the Great Depression.

Bank Negara Malaysia kept its overnight policy rate unchanged at 2 per cent, it said in Kuala Lumpur yesterday. The decision was widely expected. The benchmark is at its lowest level since it was introduced in April 2004.

'Signs of stabilisation of the global economy have emerged whilst conditions in the international financial markets have generally improved,' the central bank said. 'The assessment is that with the current low interest rates and with the fiscal stimulus gaining traction, the prevailing policy measures are sufficient to provide support to economic activity.'

Central banks from India to South Korea have stopped lowering borrowing costs as unprecedented rate cuts and more than US$2 trillion in stimulus plans help the world's economies emerge from the slowdown. Malaysia halted in April after cutting the key rate by 1.5 percentage points since mid-November, as policy makers predicted that growth will resume later this year.

The economy has 'shown signs of stabilising in the second quarter, with several indicators such as the industrial production index and retrenchments recording a slower pace of decline,' Bank Negara said.

'Accelerated implementation' of the government's RM67 billion (S$27.5 billion) of stimulus measures, continued access to financing and slower inflation will contribute to an improving economy in the second half of this year, it said.

Malaysia's gross domestic product shrank 6.2 per cent in the three months to March as exports of semiconductors and other goods slumped.

Malaysia's consumer prices fell 1.4 per cent last month from a year earlier, the first decline in more than 22 years, as the shrinking economy hurt demand for goods and services and commodities costs eased from last year's record highs.

'The decline in inflation is largely a statistical outcome reflecting the sharp rise in inflation in June 2008, when fuel prices increased following the reduction in fuel subsidies,' Bank Negara said. 'The negative inflation is expected to be temporary and is projected to turn positive as domestic economic conditions improve.'

Malaysia's ringgit fell to as low as 3.5365 to the US dollar yesterday from near a four-week high on speculation that the central bank will stem gains as the nation's recovery lags behind other economies in the region. The central bank has said that GDP probably contracted last quarter, putting the country in a recession that neighbouring Indonesia avoided while Singapore's slump abates. -- Bloomberg