Bank Negara seen holding benchmark rate

> All 10 economists in poll expect it to remain at 3.25%, as wider fiscal deficit, slower growth loom

KUALA LUMPUR: Malaysia’s central bank is expected to keep its benchmark interest rate unchanged today, a Reuters poll showed, with the economy facing a widening fiscal deficit and slower growth.

All 10 economists polled by Reuters foresee Bank Negara Malaysia (BNM) leaving its overnight rate unchanged at 3.25% at its policy review.

The central bank may need to look at a possible cut moving forward, but only if growth is significantly affected by the government’s plans to cut public spending, according to a note by Standard Chartered.

“Growth thus far, while slower, is still satisfactory, supported by consumer spending and loan growth,” the bank said.

The last time the central bank cut its rate was in July 2016, when it brought it down to 3.00% amid weak growth and uncertainty surrounding Brexit.

Malaysia raised its key rate by 25 basis points in January to “normalise” monetary policy after the economy recorded strong growth in the first three quarters of 2017.

The new government under Prime Minister Tun Dr Mahathir Mohamad has forecast growth to come in at 4.8% this year and to improve marginally to 4.9% in 2019. The previous administration had targeted growth to come in at a range of 5.5-6.0% this year.

The new government also abandoned an earlier fiscal deficit target of 2.8% for 2018, forecasting that it will widen to 3.7% – the highest since 2013. It expects the deficit to narrow to 3.4% next year.

Besides economic growth, the central bank will also need to consider investor sentiments as a rate cut could trigger capital outflows, according to RAM Ratings.

HSBC said in a research note that Malaysia’s current account surplus also gives the central bank room to maintain its policy stance despite rate increases by the US Federal Reserve.

“We do not think the sharp disinflation stemming from tax changes or the noramlisation of growth from last year’s ‘breakneck’ pace will sway the central bank to change its policy stance now,” HSBC said, adding that it sees no rate change in 2019.

Inflation fell this year after Mahathir’s government ditched a goods and services tax and reintroduced fuel subsidies to fulfil election campaign promises. Full-year 2018 inflation is seen coming in at 1.5-2.5%, before rising to a range of 2.5-3.5% in 2019.