Financial thoughts

Malaysia's central bank kept its benchmark interest rate unchanged for a 15th straight meeting as accelerating inflation and strong domestic demand weaken the case for a cut in borrowing costs.

Bank Negara Malaysia held its overnight policy rate at 3.5 percent, according to a statement in Kuala Lumpur today. The decision was expected by all 15 economists in a Bloomberg survey.

“The latest indicators show strong domestic demand will provide the support for the Malaysian economy to perform well in the coming months,'' the central bank said. “Commodity and food prices have continued their upward trend, and this is contributing to higher global inflation.''

Malaysia's inflation is near a 10-month high, preventing the central bank from cutting borrowing costs even as weakening U.S. demand threatens growth in Southeast Asia's third-largest economy. Exports from Malaysia grew in December at the slowest pace in three months as shipments to the U.S. plunged 19 percent.

“Bank Negara is balancing global growth concerns with those from inflation,'' said Matthew Hildebrandt, an economist at JPMorgan Chase Bank in Singapore. “Until risks from either global growth or inflation move decisively in one direction, I expect Bank Negara to remain sidelined.''

Malaysia's ringgit rose to 3.2160 against the dollar as at 5:37 p.m. today, compared with 3.2170 late yesterday on anticipation the central bank would keep its key rate unchanged, giving the country an advantage of half a percentage point over the U.S. benchmark rate, the most since December 2004.

Fresh Mandate

Prime Minister Abdullah Ahmad Badawi, who is seeking a fresh mandate for his ruling coalition in March 8 elections, may also want to avoid increases in interest rates that may hurt domestic demand, even as surging global commodity costs may push prices up further and force the government to raise fuel prices.

“We expect Bank Negara to remain on hold this year,'' said Wai Ho Leong, an economist at Barclays Capital in Singapore no qualifying payday advance. With elections in March, “monetary policy will be focused on maintaining the momentum of domestic demand, supported by higher fiscal expenditure.''

Further increases in interest rates could dampen private consumption, which is currently a key driver of economic growth, Leong said.

Malaysia's economy, Southeast Asia's third biggest, grew 6.7 percent from a year ago in the third quarter, the fastest pace in three years, as rising government and consumer spending countered weaker manufactured exports.

Fuel Prices

Inflation may average 2.9 percent this year, up from 2 percent in 2007, according to the median forecast of 14 economists in a Bloomberg survey. If Malaysia's government raises fuel prices this year, inflation may reach as high as 3.8 percent in 2008, CIMB Investment Bank Bhd. estimates.

Accelerating global inflation will affect Malaysian inflation in the first half of 2008, but will ease as global growth slows, the central bank said today.

“The risks to the Malaysian economy are primarily from the external sector,'' Bank Negara said. “The heightened downside risks to global growth have been affirmed by the latest data released by the large industrial countries.''

Malaysia's key interest rate is at its highest since being introduced in April 2004, after policy makers lifted it three times from November 2005 to April 2006 to curb inflation.

The central bank's present monetary policy remains “supportive of growth,'' Bank Negara said. “Overall, there continues to be a high degree of uncertainty regarding the macroeconomic environment over the policy horizon.''

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