September 18, 2014 / 10:48 AM / in 3 years

UPDATE 1-Malaysia c. bank holds rates steady, sees steady growth path

(Adds details, quotes)

By Trinna Leong

KUALA LUMPUR, Sept 18 (Reuters) - Malaysia's central bank kept its key interest rate unchanged at 3.25 percent on Thursday, holding off from a second tightening in less than three months after recent signs of a slowdown in exports and credit growth.

Economists polled by Reuters had been split over whether the bank would deliver another 25 basis point rate increase, as it did in July, to further dampen household credit growth and rising inflation.

Bank Negara's monetary policy committee said in its statement that inflation was expected to remain relatively stable for the rest of this year.

It added it would continue to assess the risks of "destabilising financial imbalances" ahead of its final policy meeting of the year on Nov. 6.

"The prospects are for the Malaysian economy to remain on a steady growth path," the bank said in a statement.

The central bank raised the policy rate in July, its first hike in three years, to address concerns over fast-rising household debt that stood at 86.6 percent of gross domestic product (GDP), among the highest in Asia.

"We were expecting a hike but the recent August data has surprised on the soft side, with both the export and industrial production. They feel that they have the time to wait and assess the outlook," said Chua Hak Bin, Economist, Bank Of America Merrill Lynch In Singapore

Malaysia's economic growth has been underpinned by strong exports and robust consumer spending in the first half, with second-quarter gross domestic product growing a healthy 6.4 percent from a year earlier.

But since then credit growth has slowed, with a rise of 8.6 percent in July compared with 9.3 percent in June, and economists expect the pace of loans to moderate further.

Malaysia's exports in July posted their weakest performance in more than a year, well below expectations, as demand from China and Japan for key goods slumped, while imports shrank on lower domestic consumption.

Exports rose just 0.6 percent from a year earlier, the weakest since June 2013, while imports fell 0.7 percent, the first decline since May last year. Industrial output nearly stalled in July, largely due to weakness in the mining sector.

Some analysts had reckoned that regardless of the loss of momentum in July, the economy was robust enough to weather another increase in rates, as policymakers still need to curb inflationary pressures and consumer debt.

The decision not to raise rates could add pressure on the Malaysian ringgit, which has declined over 2 percent against the dollar since late August.

"This decision will obviously have a dampening effect on the ringgit, in the near term," said Irvin Seah, economist at DBS in Singapore.

He said the decision to hold rates could be related to next month's annual budget announcement, which could include separate measures aimed at cooling the property market and overall consumer debt.

Consumer price data released on Wednesday showed annual inflation at 3.3 percent in August, slightly higher than July's 3.2 percent.

"Inflation has continued to stabilise as the effects of the price adjustments for utilities and energy have continued to diminish," the central bank said in its statement, adding that inflation was seen remaining stable for the rest of 2014. (Additional reporting by Anuradha Raghu and Yantoultra Ngui; Editing by Stuart Grudgings and Kim Coghill)

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