September 5, 2018 / 8:35 AM / in 2 months

UPDATE 1 - Malaysia c.bank stands pat as economy faces 'immediate' downside risks

* Policy rate kept at 3.25 pct, as widely expected

* Economy faces risks from trade tensions, other factors - c.bank

* C. bank says public sector spending to weigh on growth

By Joseph Sipalan

KUALA LUMPUR, Sept 5 (Reuters) - Malaysia’s central bank on Wednesday held its key interest rate as expected, saying the economy should stay on a “steady” growth path but heightened trade tensions are contributing to “immediate term” downside risks.

All 11 economists in a Reuters poll had forecast Bank Negara Malaysia (BNM) would hold its overnight policy rate at 3.25 percent.

Malaysia increased rates in January for the first time since July 2014, but since then has not felt pressured to have a series of hikes, unlike the Philippines – which is battling high inflation – and Indonesia, whose currency has tumbled 9 percent this year.

“In the immediate term, the economy faces downside risks stemming from heightened trade tensions, prolonged weakness in the mining and agriculture sectors and some domestic policy uncertainty,” BNM said in a statement.

The central bank did not elaborate on what it meant by domestic policy uncertainty.

BNM said it expects growth to be supported by private sector activity, with a boost from net exports.

“Public sector spending however is expected to weigh on growth as the government embarks on reprioritisation of expenditure,” BNM said.

Last month, BNM trimmed its full-year economic growth forecast to 5.0 percent, from 5.5-6.0 percent. In the second quarter, growth fell to 4.5 percent from 5.4 percent the previous period.

LOW INFLATION

Headline inflation saw the slowest annual pace in three years in June, at 0.8 percent, helped by the new government’s scrapping of a 6 percent goods and services tax, and July saw 0.9 percent.

BNM expects headline inflation to edge upwards the rest of the year and through 2019.

The central bank said domestic financial markets “continue to experience non-resident portfolio outflows” due to global developments, in line with regional economies.

Brian Tan, a Singapore-based economist with Nomura, said BNM will likely hold its key rate the rest of 2018, though an escalation of the U.S.-China trade war may make it cut its benchmark to support exports.

“There is an argument for a weaker currency which would be good for exports. It would be just like in 2015 and 2016, when a very weak ringgit helped sustain exports growth,” Tan said.

In 2018, the ringgit has weakened about 2.4 percent against the dollar.

Unlike Indonesia, Malaysia has a current account surplus. Earlier Wednesday, it reported a July trade surplus of 8.3 billion ringgit ($2.0 billion), higher than the 6.3 billion ringgit seen in a Reuters poll. ($1 = 4.1420 ringgit)

Reporting by Joseph Sipalan; Editing by Richard Borsuk

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