Malaysia's central bank held its overnight policy rate at 3.25 percent on Thursday, keeping policy steady while the country and its markets were rocked by corruption allegations against Prime Minister Najib Razak. The central bank's decision was as expected by a Reuters poll of economists. Inflation remains benign and a recovery in export growth depends on overseas markets.
The Southeast Asian economy grew 5.6 percent in the first quarter, but the central bank expected a slower rate in the second quarter. "For Malaysia, the latest indicators point to continued expansion of the economy in the second quarter, albeit at a more moderate pace," Bank Negara Malaysia's (BNM) monetary policy committee said in a statement. Heavily dependent on exports, Malaysia's prospects are at the mercy of weak global prices for the natural gas and commodities it produces, and acute uncertainties hanging over crucial markets in China and Europe.
Exports weakened in the last two months. Despite that, central bank remains confident that the country's "growth continues to be underpinned by domestic demand". Domestic demand was also subdued by the implementation of a Goods and Services Tax (GST) in April. But inflation remains low, averaging at 2 percent in April and May, with the central bank forecasting it would hover between 2 to 3 percent due to lower oil prices earlier this year.
"Going forward, headline inflation is expected to be higher following the impact of the GST and the recent adjustments to domestic fuel prices, before moderating towards the second half of 2016," the central bank said. Given the chances of slower economic growth, some economists foresee a 25 basis point policy rate cut before the year end, but most say no downward adjustments are required.
A more pressing worry for the central bank, analysts say, is renewed pressure on the ringgit currency as the political storm rages around Najib. "It will add an air of uncertainty surrounding the ringgit but from a monetary policy perspective, what's important is to look at the underlying inflationary pressure," said Michael Wan, economist at Credit Suisse. Currency dealers said the central bank has been intervening to prop up the ringgit since the Wall Street Journal reported last week that investigators probing debt-laden state fund 1MDB had traced nearly $700 million to bank accounts in Najib's name.
Reuters could not independently verify the report. Najib has denied taking any money from 1MDB or other entities for personal gain. Having lost almost 8 percent against the dollar since the start of the year, the ringgit is the weakest performer among emerging market Asian economies. Closing on Thursday at 3.7945 per dollar, after a slight rebound, the currency is just 0.05 percent weaker than it was before the WSJ dropped its bombshell. But the drop below 3.80 per dollar earlier this week held deep significance for Malaysians, as that was the rate their currency was pegged in September 1998 to protect the country from the Asian financial crisis. Bank Negara took the ringgit off the peg in 2005.
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