March 2, 2017 / 8:17 AM / 6 months ago

UPDATE 1-Malaysia c.bank holds key rate, says economy recovering

* Policy rate kept at 3.00 pct, its level since July

* Growth momentum can be sustained in 2017- BNM

* C.bank: Ringgit stabilising, sufficient liquidity for banks

* C.bank: headline inflation to be relatively high over 1H 2017

By Joseph Sipalan

KUALA LUMPUR, March 2 (Reuters) - Malaysia's central bank kept its key rate unchanged on Thursday as expected, and expressed optimism that the better growth momentum seen in late 2016 can be sustained through this year.

Most economists predicted the key rate will remain at 3.0 percent the rest of this year, especially if United States rates rise, as expected.

Nine out of 10 economists polled by Reuters forecast the central bank would keep its key rate unchanged. The other forecast a 25 basis point cut.

Bank Negara Malaysia said the current overnight rate is "accommodative and supportive of economic activity", which will be helped by a "slightly faster pace" of global economic expansion in 2017.

BNM is "sending a neutral signal on monetary policy, suggesting that they are unlikely to change interest rates at least this year," said Julia Goh, an economist for UOB.

Trade-reliant Malaysia saw economic growth rates decline for five quarters, due to poor commodity prices, before improving in the second half of last year.

BNM said that the ringgit currency - which hit a near 19-year low of 4.4980 to the dollar on Jan. 4 - has "continued to stabilise" along with other emerging market currencies.

The ringgit was at 4.448 in mid-afternoon trade on Thursday, leaving it 1 percent stronger this year but still down 12.8 percent from July when the central bank cut its key rate by 25 basis points - the first cut in more than seven years.

A second cut was widely expected shortly afterward, but the bank held off as the ringgit faced pressure, especially towards the end of 2016.

HIGHER GROWTH

After slowing for five quarters, Malaysia's economy had annual growth of 4.3 percent in July-September and 4.5 percent in October-December. Full-year 2016 growth came in at 4.2 percent, the slowest since 2009, when the economy contracted.

While the growth outlook has improved, "nevertheless, there remain risks to global growth arising from threats such as protectionism, geopolitical developments, heightened volatility of financial markets and negative developments in the prices of key commodities," BNM said.

In October, Prime Minister Najib Razak said growth in 2017 likely would be 4-5 percent.

Inflation, no issue for much of 2016, will be a significant factor for BNM if the pace keeps rising this year. In January, annual consumer inflation hit 3.2 percent, its highest since February 2016.

The central bank expects headline inflation - which it says will be "relatively high" in the first half of 2017 on higher fuel prices - to dip in the second half.

"Historically, they don't respond to inflation if it is driven by fuel prices," said Brian Tan, a Nomura analyst.

Both Goh and Tan do not think BNM will match any possible hike in U.S. interest rates by the Federal Reserve, even if it sparks further capital outflows from Malaysia.

"Malaysia's monetary objective is to ensure growth and domestic consumption... those factors are always used to set policy direction so they are unlikely to follow the Fed if it raises interest rates," Goh said.

Reporting by Joseph Sipalan; Editing by Richard Borsuk

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