Malaysia holds rates, easing seen over

Malaysia's central bank kept interest rates steady on Tuesday at a record low of 2 percent for the second successive month in a decision that economists said likely marked the end of its easing cycle. The decision was in line with expectations in a Reuters poll in which all 14 economists had predicted that the central bank would hold fire again after a cumulative 150 basis points of cuts prior to April's meeting when it also kept rates steady.
"The current assessment is that the accumulated monetary policy initiatives and measures to enhance access to financing are sufficient to provide support to domestic demand," Bank Negara Malaysia said in a statement. Asia's central banks, with the exception of the Philippines, have generally signalled that the aggressive monetary easing that they undertook to try to stimulate domestic demand is over and Thailand last week held rates at 1.25 percent.
"Unless the economic outlook abruptly deteriorates and the recent tentative signs of optimism proved to be a false start, I don't think there is a strong case for a further monetary easing," said Azrul Azwar Ahmad Tajudin, economist at Bank Islam in Kuala Lumpur.
Malaysia's rate decision came ahead of Wednesday's first quarter gross domestic product data, expected to show that Asia's third most trade dependent economy contracted by 4 percent in the first quarter of 2009 from a year earlier, according to a Reuters poll.
That data is expected to be followed by a further downward revision on Thursday of official forecasts that saw the economy shrinking by just 1.0 percent this year. Second Finance Minister said earlier on Tuesday that he expected the economy to recover in the third quarter of 2009.
Despite the expected contraction, many economists believe the worst is over in Malaysia and that recovery will be led by a boost to domestic demand from a 60 billion ringgit ($17.21 billion) package of government spending and loan guarantees over two years.
That spending boost will however leave Malaysia in the worst fiscal position in Asia, according to recent research from Citigroup, a legacy of years of overspending and reliance on booming oil and commodities revenues.