Anuradha Raghu and Lilian Loh
Malaysia’s central bank is expected to keep its key interest rate unchanged on Thursday as strong domestic demand fuels concerns about growing household debt, offsetting worries about the weak global economy.
At the same time, exports in May probably rebounded despite the shaky external outlook, reinforcing views that policymakers will stand pat at their next meeting on Thursday.
All 16 economists in a Reuters poll expect Bank Negara to leave the overnight policy rate (OPR) unchanged at 3.0 percent for the seventh straight meeting.
Barring a severe economic slowdown, most analysts expect rates to remain unchanged at that level for the rest of the year.
Exports in May, meanwhile, probably rose 5.5 percent from a year earlier, after contracting 0.1 percent in April, according to the median forecast of the economists. The forecasts ranged from 0.6 to 9.0 percent.
Imports in the same month may have increased 8.5 percent from a year earlier, compared with 7.4 percent in April.
The trade surplus was estimated at 7.6 billion ringgit, up from 7.5 billion ringgit in the previous month.
Trade data will be released on Wednesday.
Rate cut seen only if economy slumps
Economists said Malaysia’s economy has not weakened to a level which warrants monetary easing.
Robust domestic demand — powered by $444 billion worth of investments under the government’s Economic Transformation Program, implementation of a minimum wage policy and pre-election government spending — is expected to keep growth this year at 4-5 percent, according to official estimates, moderating from 5.1 percent in 2011.
The economy expanded by 4.7 percent in the first quarter from a year earlier.
“Growth will have to slow much more sharply, with a material loss of jobs and/or contraction in credit, before concerns on household debt are overcome and rate cuts are a serious consideration,” said Citibank economist Kit Wei Zheng.
Bank Negara Governor Zeti Akhtar Aziz recently said that interest rates were appropriate for the time being as domestic demand remained strong despite external uncertainties.
“At this point in time, unless there are any other significant developments in our assessment, then interest rates are at the appropriate level,” Zeti told reporters.
Inflation has also moderated since last year, easing to 1.7 percent in May from a year earlier.
“Perhaps [policy] stability is the best option in times of uncertainty,” said DBS economist Irvin Seah, adding that Malaysia has a fairly high household debt to GDP ratio of about 77 percent.
Central banks in Philippines, Thailand and Indonesia all have kept rates on hold in recent months, while remaining wary of growth-risks stemming from the euro zone debt crisis and a slowdown in China.
Low base effects help exports rebound
The expected increase in May exports after two months of annual declines is likely due to comparisons with low levels a year ago and the global demand outlook remains weak, noted Seah from DBS.
“PMIs of key export markets have been heading south again lately while indicators on the global electronics cycle are pointing to an easing in the recent inventory restocking process,” he said.
Stronger headline export numbers also may have been due to higher LNG exports to Japan, while palm oil and oil prices softened.
Exports of Malaysian palm oil products in May fell 1.0 percent from a year ago, and declined 0.2 percent from the previous month, according to cargo surveyor Societe Generale de Surveillance.