Malaysia's central bank kept interest rates on hold on Friday, defying expectations soaring inflation would spur it into action even as the economy slows and political uncertainty weighs. Bank Negara held its key rate at 3.50 percent for the 18th straight meeting, but raised its full-year forecast for average inflation to 5.5-6.0 percent from 4.2 percent previously.
"In the next 12 months, while both the risks to higher inflation and the risks to slower growth have increased, the immediate concern is to avoid a fundamental economic slowdown that would involve higher unemployment," the central bank said in a statement.
Surging energy and food prices are putting pressure on the central bank to tighten, but higher credit costs could imperil growth at a time of weakening global demand and domestic political problems. Malaysia's annual inflation leapt to 7.7 percent in June, its highest level in more than 27 years, after the government raised fuel prices sharply. The figure, published on Wednesday, swayed analysts' forecasts in favour of a rate rise after the market had been virtually evenly divided about the policy meeting's outcome.
"Inflation will continue to accelerate for a couple more months and peak in August and September and come off in the fourth quarter," said Tim Condon, head of Asia research at ING. "So I suspect that's Bank Negara's forecast as well." The central bank last raised interest rates in April 2006. India, Indonesia, Thailand, the Philippines, Vietnam and Taiwan have all raised interest rates this year in the face of quickening inflation globally.
But South Korea, China and Japan have left their rates on hold this year. Bank Negara said the recent rise in fuel prices would have a deflationary economic impact in the second half of 2008 and the early part of 2009. Inflation would remain high in the second half of this year and into early next year before moderating towards the middle of 2009, it added. "At this stage, the concern is for broader price increases and second-round effects, which would result in inflation being persistent," the central bank said.
"In such circumstances, the appropriate monetary policy response will be taken in order to maintain medium-term price stability and ensure that the high inflation does not undermine the longer-term growth prospects of the Malaysian economy." Some analysts have said Malaysia was expected to tread carefully in hiking rates as it risks burning a bigger hole in consumers' pockets, after an increase in fuel and electricity tariffs.
Malaysia's economic prospects have weakened as global demand for the country's exports falters and a long stand-off between the government and the opposition emboldened by a strong showing in this year's election unnerves foreign investors. The Southeast Asian economy is officially expected to grow 5 percent this year, slowing from 6.3 percent in 2007.
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