Zeti: Malaysia’s policy to stay supportive of growth

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MALAYSIA’S monetary policy stance will remain supportive of growth amid uncertainty in the global recovery and even as the risk of inflation also increases, says Malaysia’s central bank Governor Tan Sri Dr Zeti Akhtar Aziz.

Threats to Malaysia’s expansion have risen as policies in advanced economies lead to higher volatility, Zeti said in an interview in Washington.

Accelerating price gains in the Southeast Asian nation are temporary, and will ease to the long-term average of three per cent by 2016, she said.

“I would like to put it in very clear terms that right now, the monetary policy stance is to be accommodative, that means to support growth,” Zeti added.

“Given the global outlook for growth and so on, that monetary policy will still need to remain accommodative.”

Bank Negara Malaysia (BNM) held off on a second consecutive interest-rate increase last month and said it would assess the balance of risks between growth and inflation in considering further policy moves.

Exports, which helped the economy expand more than six per cent in the first half of 2014 (1H14), have cooled in recent months, while subsidy cuts and a new consumption tax next year are seen curbing private spending.

“Even if BNM has the space to hike because growth has been OK, it may not be in a rush to do so,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG.

“With additional risks to growth that Zeti highlighted, that means that space to hike may be somewhat weakened as well. It adds to further reason to pause and wait and see.”

The government raised fuel prices on October 2, the latest in subsidy reductions ranging from sugar to electricity that have left companies and consumers grappling with higher costs. The finance ministry forecasts inflation of four to five per cent next year, the fastest since 2008.

While the risk of quickening consumer-price gains has increased, “our assessment is that inflationary expectations are well-anchored,” Zeti said.

“The trend that we need to monitor is the potential second-round effects, and right now our assessment is that these second-round effects would be weak.”

The central bank raised its key rate by 25 basis points in July to 3.25 per cent, the first such move since 2011.

Interest-rate swaps are pricing in a 50 basis-point increase in borrowing costs in the next year, data compiled by Bloomberg show. The last policy decision for 2014 is on November 6.

“We don’t think there’s going to be a hike in November,” Santitarn said.

“Another hike will come probably early next year.”

The ringgit has climbed 0.7 per cent against the US dollar this month, among the best performers of 11 major Asian currencies tracked by Bloomberg.

Malaysia raised its growth forecast for 2014 to as much as six per cent from a previous projection of 4.5 to 5.5 per cent. The expansion will be between five and six per cent in 2015, the finance ministry said October 10.

While the economy is now more diversified and spurred by domestic consumption and investment, external demand remains an important source of growth, Zeti said. There are concerns the global recovery would stall, she said.

Federal Reserve vice chairman Stanley Fischer said weaker-than-expected global growth could prompt the US central bank to slow the pace of eventual rate increases.

The International Monetary Fund (IMF) this month cut its outlook for world expansion in 2015 and warned of the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels.

The Fed’s normalisation will result in more volatile markets even as it indicates the world’s largest economy is on a stronger growth path, Zeti said. For Malaysia, the change in the US’ policy direction would have more impact on the ringgit and other financial markets, and less on the economy, she said.

The IMF expects growth in Malaysia and the Philippines to remain strong in 2014 to 2015, “helped by favourable external demand and broadly accommodative policies and financial conditions,” it said. The fund forecast expansion of 5.9 per cent for Malaysia in 2014 and 5.2 per cent in 2015.

The government will implement a six per cent goods and services tax from April 1. Prime Minister Datuk Seri Najib Tun Razak said on October 10 his administration will hand out more cash to lower-income households to reduce the impact of the levy and cope with higher prices as he cuts subsidies.

“The effect of these adjustments have tremendous benefits because it removes price distortions in our economy and it enhances the fiscal position of the government,” Zeti said.

“This is what we want to see because it will make our position on stronger foundations going forward.” — Bloomberg