No More Rate Hikes for 2010

September 02, 2010

KUALA LUMPUR, Sept 2 – Malaysia’s central bank held its key interest rate steady at 2.75 per cent today, in line with expectations, and economists said it would stay pat for the rest of this year due to concerns over the global economy.

Bank Negara said that while domestic growth drivers remained “robust”, the slowdown in demand for exports from Asia’s third most trade-dependent economy, would drag on economic growth.

Trade data released just after the rate decision showed that export in July slowed to 13.5 per cent from a year earlier from 17.2 per cent growth in June.

“I think this is justified, they moved pre-emptively, the global economy is slowing and rates are at a neutral level,” said Kit Wei Zheng, economist at Citibank in Singapore.

Malaysia’s central bank started tightening policy earlier than most other central banks in Asia and had made three consecutive 25 basis point hikes already. A Reuters poll showed it would hold rates today.

Malaysia’s consumer price inflation index ticked up to an annual 1.9 per cent in July from 1.7 per cent in July after the government implemented small price hikes for food and fuel.

“Despite the adjustment in retail fuel prices in July, inflation is expected to rise at a modest pace in the coming months. Going into 2011, inflation is projected to remain moderate,” the central bank said in its statement.
The pace of economic growth in Malaysia slowed to 8.9 per cent in the second quarter from the first quarter’s blistering 10.1 per cent and that pattern is expected to continue in the second half of 2010 as concerns emerge over the strength of the global economic recovery.

Interest rate hikes by the central bank mirrored the faster pace of growth in the first half and most economists now see Malaysia’s economic growth slowing in the second half of the year to 5-6 per cent.

The three-month KLIBOR was quoted at 2.92 per cent today. In the forward starting swaps space, the 3-month rates swap on a contract starting after three months was also quoted at 2.94 per cent.

This implies the market pricing in 2 bps of rate hikes until end-November. The central bank’s last monetary policy meeting for the year is on November 12.