Malaysia central bank seen holding key rate on moderate growth, core inflation

Twelve economists polled by Reuters unanimously expect the Bank Negara Malaysia (BNM) to hold its overnight policy rate at 3.25 percent.

The central bank raised the rate by 25 basis points to this level in January, the first increase since July 2014, in a bid to "normalise" policy well before national elections that must be held by August.

"Although headline inflation is higher, core inflation is trending down implying no immediate need for tightening policy stance," HSBC said in a recent note to clients.

Malaysia's 2017 full-year inflation came in at 3.7 percent, at the top end of the central bank's forecast of 3-4 percent.

However, BNM expects inflation to ease in 2018. Headline inflation has moderated after staying above 3 percent each month in 2017, peaking at 5.1 percent in March.

In its January review of the key rate, BNM said it saw the need to take pre-emptive measures to prevent a build-up of risks from leaving interest rates "too low for a prolonged period of time", and that the rate "remains accommodative".

The central bank had been widely expected to go through with the hike at the time, well ahead of the national election that is set to be a bitter fight between Prime Minister Najib Razak and his one-time mentor and a former premier Mahathir Mohamad.

Najib, who is facing criticism for a corruption scandal at a state-owned fund and anger over rising living costs, is counting on Malaysia's stronger-than-expected 2017 full-year growth of 5.9 percent to help boost his chances at the polls.

The government expects the economy to grow between 5 percent and 5.5 percent in 2018.

The central bank is likely to keep rates unchanged in 2018 as growth moderates, but external pressures could lead to another hike at the end of the year, said Brian Tan, an economist with Nomura in Singapore.

"If financial imbalance risks continue to build and growth doesn't moderate or continues to hold up, that would open up the window for them to normalise further," he told Reuters.