Malaysia c.bank seen holding key rate on U.S.-China trade war concerns

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KUALA LUMPUR (Sept 3): Malaysia's central bank is expected to keep its benchmark interest rate unchanged at a meeting on Wednesday, as it keeps tabs on how far the United States and China will take their ongoing trade war.

All 11 economists polled by Reuters see Bank Negara Malaysia (BNM) holding its overnight policy rate at 3.25%.

Malaysia has raised its policy rate once this year — by 25 basis points in January. That was its only hike since July 2014.

BNM is expected to maintain a neutral stance in its monetary policy, as the economy faces the twin issues of a potentially slowing economy and global market uncertainty, Standard Chartered said in a note on Friday.

"An important factor going forward is whether the U.S. and China expand the scope of bilateral tariffs beyond the current US$50 billion worth of goods on each side," the bank said.

The central bank reported growth of 4.5% in the second quarter of this year, the slowest pace since the last quarter of 2016. BNM governor Nor Shamsiah Mohd Yunus also revised their 2018 full-year forecast to 5%, down from an earlier range of 5.5%-6.0%.

To manage the effects of a weakening ringgit, which has depreciated since April, the central bank will no longer force exporters to convert proceeds into ringgit and will allow flexibility for hedging.

Since April 2, the ringgit has lost 6.79% against the dollar and was trading at 4.122 as at midday on Monday.

"Things are slowly turning sour for the Malaysian ringgit, keeping USD/MYR on track to meet our 4.35 forecast for end-2018," said Prakash Sakpal, Asia economist at ING in Singapore.

Not long after taking office in May, Mahathir scrapped a 6% goods and services tax and replaced it with a sales and services tax which took effect on Sept 1, after a three-month tax holiday.

Low inflation induced by government policy and the projected slowdown in growth will likely stay the central bank's hand on any changes to its key rate, HSBC said in a note on Friday.

"BNM will not change its monetary policy now, especially during a time of fickle capital flows," HSBC said.