Malaysia holds interest rates steady

KUALA LUMPUR: Malaysia's central bank held interest rates steady at 3 percent on Thursday, surprising financial markets which had been betting on a hike, as the authorities brace for growth to slow due to weaker global demand.

RADHIKA RAO, REGIONAL ECONOMIST, FORECAST

"BNM opted to maintain benchmark OPR unchanged at 3.0 percent presumably to err on the side of caution as authorities expect exports to moderate on external factors. Nonetheless they did undertake a quasi-tightening move by hiking the SRR by 100bps to 4.0 percent.

"Admittedly the central bank treaded a fine line today to balance downside risks to growth and pipeline price pressures. However we think this a temporary pause and expect the benchmark rates to be upped by 25 basis points in Q3, as BNM signals that further normalisation moves could be considered to maintain price stability."

BACKGROUND

Malaysia's annual inflation rate stood at 3.3 percent in May, the highest in more than 2 years. Bank Negara has forecast full-year inflation at between 2.5 percent and 3.5 percent.

Economists expect inflation to accelerate further after a power tariff hike took effect on June 1, and higher food prices as the festive season for Eid al-Fitr approaches.

Malaysian economic growth is expected to cool due to the uncertain global outlook. May export growth came in at 5.4 percent, way below the 10.8 percent forecast in a Reuters poll and 11.1 percent in April.

Copyright Reuters, 2011