Malaysia holds rate but warns it may have to raise rates

    Malaysia's central bank held its Overnight Policy Rate (OPR) steady at 3.0 percent but warned that financial imbalances were building up and "going forward, the degree of monetary accommodation may need to be adjusted to ensure that the risks arising from the accumulation of these imbalances would not undermine the growth prospects of the Malaysian economy."
    Bank Negara Malaysia (BNM), which has maintained its benchmark rate since May 2011, said inflation had stabilized in recent months but going forward it was expected to remain above its long-run average due to higher domestic costs.
    "Amid the firm growth prospects and inflation remaining above its long-run average, there are signs of the continued build-up of financial imbalances," BNM said, adding that macroeconomic policies and prudential measures helped moderate growth in household debt, but the current monetary and financial conditions could lead to a broader build up in imbalances.
    Malaysia's headline inflation rate was steady at 3.5 percent in March from February after accelerating since September.
    The central bank has often said it expects inflation to rise this year and possibly exceed the long-term average of 3.2 percent due to cuts in subsidies and changes in taxes in April. Economists expect the central bank to raise rates later this year to contain inflationary pressures.

    BNM said the domestic economy continued to expand in the first quarter of this year and domestic demand and the improved international environment, including in Asia, will support it going forward.
    "Conditions in the international financial markets have also improved following gradual and orderly policy adjustments in the major advanced economies while the impact from geopolitical developments remains contained," the bank said.
    Malaysia's Gross Domestic Product expanded by 2.1 percent in the fourth quarter of last year from the third quarter for annual growth of 5.1 percent, up from 5.0 percent.
    In addition to rising exports, the central bank expects private sector spending to remain robust, underpinned by stable income growth, and investment activity to be supported by broad-based capital spending, particularly in manufacturing and services.
    "The prospects are therefore for the growth momentum to be sustained," BNM said.

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