Malaysia's inflation has probably peaked and price pressures may ease as the global economy deteriorates, said central bank governor Tan Sri Zeti Akhtar Aziz, joining neighbours in signalling less pressure to tighten policy.
“Right now, we have to wait for greater clarity on the outlook for growth and inflation before taking any further adjustments” on interest rates, Zeti said in an interview in Washington late Sunday. “Given the more moderate global growth and in terms of the external environment and its implications on the domestic economy, we believe domestic sources of inflationary pressures will be less.”
Interest rates were still at a level that was supportive of growth, which might be “about the same or slightly better” in the second half of this year compared with the first, Zeti said. The economy grew at the slowest pace since 2009 last quarter. The Government would give updated forecasts for growth in 2011 and 2012 when the annual budget was unveiled on Oct 7, she said.
Europe's debt crisis and a weakening US recovery are threatening growth in Asia as demand for the region's exports eases. Central banks from South Korea to the Philippines have refrained from rate increases in recent months, with Bank Negara keeping the benchmark overnight policy rate at 3% this month after four increases from early March 2010 to May this year.
Malaysia's inflation slowed in August for the second straight month to 3.3%. Consumer prices would probably rise 3% to 3.5% in 2011, Zeti said.
Asian currencies had their biggest weekly drop since 1998 last week as concern the global economy was headed for a recession dimmed the outlook for exports and prompted investors to favour safer bets than emerging-market assets. Asian stocks fell yesterday, with the MSCI Asia Pacific Index set for its lowest close since June 2010. The FTSE Bursa Malaysia KLCI Index is at its lowest level since July 2010.
The ringgit has fallen more than 6% in the past month, along with most regional currencies. It was little changed at 3.1835 a dollar as of 9:41am in Kuala Lumpur yesterday.
“What we need to monitor closely is destabilising capital flows,” Zeti said. “We want to achieve orderly market conditions in the foreign-exchange market, in the domestic money markets, to ensure there is ample liquidity and that trade financing is not disrupted. It is very important that it remains orderly for exporters and importers, that there is no uncertainty with respect to our currency.”
Bank Negara had intervened in currency markets to limit the swings in the ringgit, she said, without specifying when officials did so.
“There have been times that we have been in the market to restore and ensure orderly conditions and this is the only motivation for our intervention” rather than trying to influence the trend, Zeti said. Malaysia had been able to cope with a higher degree of volatility in the currency in the past few years because of a strengthened financial system, she said.
The central bank was not rushing to let its currency be fully traded overseas anytime soon, the governor said. Then-Prime Minister Tun Dr Mahathir Mohamad fixed the ringgit at RM3.80 per dollar in September 1998 during the Asian financial crisis, blaming speculators including George Soros for a 34% plunge in the currency. A ban on offshore trading of the ringgit has remained in force since, though the peg was removed in 2005.
“Given this kind of highly uncertain volatile environment, we would not change our circumstance with respect to the internationalisation of our currency,” Zeti said.
“We are working towards putting in place the pre-conditions for such internationalisation but as of now, that certainly would not be a consideration given the highly uncertain and volatile international, financial and economic environment.”