Finance & Business World

Malaysia's central bank kept its benchmark interest rate unchanged for a 16th straight meeting, as inflation at a 13-month high leaves less room for a cut in borrowing costs that would spur growth.

Bank Negara Malaysia maintained its overnight policy rate at 3.5 percent, according to a statement in Kuala Lumpur today. The decision was expected by all 14 economists in a Bloomberg News survey.

“Cutting rates will be a bad mistake at a time when inflation is clearly on the up trend,'' said Joseph Tan, a strategist at Fortis Bank in Singapore. “Malaysia is no exception to the accelerating inflation that you are seeing all across Asia right now.''

Record prices of oil, rice and other commodities have raised inflation in the region, preventing central banks from reducing borrowing costs to spur growth as a U.S. slowdown threatens Asian exports. A weakened government in Malaysia may also prevent any attempt to raise interest rates, analysts said.

“Global energy and food prices have risen sharply since the beginning of the year from their already high levels,'' Bank Negara said in today's statement. “After evaluating the evidence on the downside risks to growth and the upside risks to inflation, the bank has decided to maintain the current stance of monetary policy.''

`Hugely Unpopular'

Voters unhappy with soaring fuel and transport prices contributed to Prime Minister Abdullah Ahmad Badawi's ruling coalition losing its two-thirds parliamentary majority for the first time in 34 years in March general elections. The opposition says it can lure enough coalition lawmakers over to form a new government.

“To be raising interest rates at a time like this will be hugely unpopular,'' Tan said. “The lesser of two evils will be to keep rates steady.''

Malaysia's consumer prices rose 2.8 percent from a year earlier in March. The central bank forecasts inflation may average as much as 3 percent this year, accelerating from 2 percent in 2007 payday loans.

Governor Zeti Akhtar Aziz, who has kept the benchmark interest rate unchanged at 3.5 percent since April 2006, said last week raising interest rates is “not the answer'' to check inflation in an environment where prices are spurred by supply shortfalls.

“A major uncertainty at this stage is the extent of the moderation in global economic activity and the impact it will have in reducing global price pressures,'' the central bank said today. “The increase in food prices reflects a structural phenomenon'' requiring measures that ensure supply, promote higher food production, and enhance efficiency.

Controlled Prices

The government needs to adjust prices of controlled items in the country in a “gradual'' manner, it added. Whether inflation will remain within the forecast 2.5 percent-to-3 percent average this year is “dependent on the degree to which the increase in global prices have an impact on domestic prices and the extent to which administered prices are adjusted.''

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

Southeast Asia's third-largest economy is expected to grow 5 percent to 6 percent in 2008, easing from 6.3 percent last year as global trade slows, Bank Negara said last month.

“While the slower external demand will have some moderating impact on the Malaysian economy, growth continues to be supported by an expansion in domestic demand,'' Bank Negara said. “Despite the global financial turmoil, domestic credit conditions have remained favorable as demand for financing continues to be supported by the ample liquidity in the financial system.''

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