(Analyst comment, details)
By Anuradha Raghu
KUALA LUMPUR, Nov 8 (Reuters) - Malaysia's central bank kept its key interest rate unchanged at 3.0 percent on Thursday, pinning hopes on domestic demand to drive growth and offset weakness in the export markets of Europe and the United States.
The decision was in line with a Reuters poll in which all 17 analysts had predicted that Bank Negara would keep the overnight policy rate steady for the ninth consecutive time at its final monetary policy meeting of the year.
"The sustained expansion in domestic activity has offset the weaknesses in the external sector," Bank Negara said in a statement.
"Looking ahead, private consumption will be supported by income growth and stable employment conditions."
Several central banks in the region and beyond have eased policy to support growth as the euro zone's debt problems, a sluggish recovery in the United States and slower growth in China weigh on demand for Asian goods.
Thailand, South Korea, the Philippines and Japan eased monetary policy last month to support growth while Australia held rates on Tuesday after a quarter-point cut to 3.25 percent in October.
Southeast Asia's biggest economy, Indonesia, kept its rates steady at a record low of 5.75 percent on Thursday and South Korea is expected to stand pat at its policy meeting on Friday.
Bank Negara reiterated that its current monetary policy stance is "accommodative and supportive" of the economy which grew a surprisingly strong 5.4 percent in the second quarter, boosted by a jump in private and government investment.
Industrial production figures, released earlier on Thursday, rose a brisk 4.9 percent in September from a year earlier, well above a Reuters poll forecast of 0.6 percent.
Third-quarter gross domestic product data is due on Nov. 16 and trade data for September on Friday. Economists expect exports to fall for a third straight month, but say the pace of decline would slow from August's 4.5 percent plunge, which was the biggest drop in nearly three years.
Bank Islam chief economist Azrul Azwar Ahmad Tajuddin said the central bank is likely to keep rates on hold until mid-2013 but could then be forced to tighten as inflationary pressures rise.
"If global recovery gathers momentum in the second half of next year, and compounded with the sustained strength in domestic demand, we will see quite significant inflationary pressures in the second half of next year," he said.
The central bank said it expected inflation to remain moderate this year with a slight increase possible in 2013. Headline inflation for September was 1.3 percent year-on-year, the lowest in more than two years.
The government has increased public spending ahead of a national election that must be called by next April. Some economists believe that once the spending tails off, growth could come under pressure.
"The downside risks to growth really stem from the possibility that public investment growth may potentially slow after the election, particularly after coming off a high base this year," said OCBC economist Gundy Cahyadi.
Reporting by Anuradha Raghu; Editing by Sanjeev Miglani and Stuart Grudgings