May 10, 2018 / 8:06 AM / in a year

UPDATE 1-Malaysia holds key rate as election shock spurs economy concerns

* Overnight interest left at 3.25 pct, as widely expected

* Decision comes just after historic vote to change governments

* Current rate will help ensure steady domestic growth

* Malaysia has entered uncharted territory - Moody’s

By Joseph Sipalan

KUALA LUMPUR, May 10 (Reuters) - Malaysia’s central bank kept its key interest rate unchanged on Thursday, citing lower inflation and steady economic growth hours after a shock election victory for the opposition that Moody’s rating agency said left the country in uncharted territory.

Bank Negara Malaysia left its overnight policy rate at 3.25 percent, as expected by all economists in a Reuters poll.

Thursday’s policy meeting was scheduled before Prime Minister Najib Razak last month called a general election for May 9.

After opposition parties led by former premier Mahathir Mohamad scored a stunning victory - which will bring the first change of government since independence in 1957 - public holidays were declared for Thursday and Friday.

With the holiday, financial markets were closed and there was no domestic trading. But Malaysian assets traded offshore took a beating. The ringgit’s one-month non-deliverable forwards fell 1.2 percent after the opposition victory.

The offshore ringgit’s fall and a rise in the cost of insuring Malaysia’s debt showed how nervous investors were about the stunning election defeat of a coalition ruling the country for six decades.

“Some campaign promises, if implemented without any other adjustments, would be credit negative for Malaysia’s sovereign,” Moody’s said, citing the proposed abolishment of the goods and services tax and the reintroduction of fuel subsidies. {nL3N1SG7LP]

Capital Economics said that the economy “has cooled in recent quarters, and political uncertainty following yesterday’s shock election result has increased the downside risks to growth.”


In its statement on Thursday’s policy decision, BNM made no mention of the election. Officials did not meet reporters.

“At the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid lower inflation,” the central bank’s statement said.

BNM said headline inflation is expected to remain moderate over the year. Headline inflation slowed in the first quarter, with the annual rate declining to 1.3 percent in March - its slowest in nearly two years.

At its meeting in January, when inflation was higher, the central bank raised its rate 25 basis points to “normalise” policy.

The January hike was BNM’s first since July 2014, and the first change since July 2016, when there was a 25 basis point cut.

Malaysia reported 2017 full-year growth of 5.9 percent. Growth of between 5.0 and 5.5 percent is forecast for this year.

The central bank said it expects a stronger ringgit exchange rate this year will mitigate import costs.

“However, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain,” BNM said.

Reporting by Joseph Sipalan; Editing by Richard Borsuk

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