Malaysia to stand pat on policy rates

Bank Negara Malaysia is likely to hold on to its 3% rate amid inflation drop.

According to Nomura's Asia Special Report, Bank Negara Malaysia (BNM) has kept policy rates on hold at 3.00%. There is space to cut given the decline in headline CPI, but they believe BNM will remain cautious about doing so. 

Here's more from Nomura:

Hence, our base case view is that BNM will keep the policy rate unchanged for the rest of 2012, consistent with its view that current monetary policy conditions are appropriately supportive of growth. In addition, with the elections delayed, we think fiscal policy is likely to remain expansionary and subsidy policy to be kept in place.

In scenario 1, we would expect BNM to hike its policy rate by 50bp starting in late 2012 given the limited impact of the commodity price surge on headline inflation. Furthermore, an increase in commodity prices is positive for economic growth by virtue of Malaysia being a net exporter of commodities.

In scenario 2, where global growth weakens significantly, we would expect BNM to cut the policy rate by only 50bp as we expect GDP growth to be supported by pre-election expansionary fiscal policy, which in turn adds to BNM‟s caution about lowering rates too far.