Malaysia central bank holds key rate steady on inflation risks

KUALA LUMPUR (Reuters) -- Malaysia's central bank kept its benchmark interest rate steady on Thursday, in line with market expectations, as it flagged an expected pickup in inflation over the second half of 2024 following changes in diesel subsidies.

All 32 economists surveyed by Reuters had expected Bank Negara Malaysia (BNM) to keep its overnight policy rate (OPR) at 3.00%, with a majority forecasting no changes until at least 2026.

BNM said inflation would likely trend higher following diesel subsidy cuts in much of the country last month, and maintained its projection for headline inflation to range between 2%-3.5% for the year.

"Going forward, the upside risk to inflation would be dependent on the extent of spillover effects of further domestic policy measures on subsidies and price controls to broader price trends, as well as global commodity prices and financial market developments," BNM said.

Inflation has remained modest this year, with the consumer price index rising 2% in May from a year earlier, but could tick up as the government looks to remove more fuel subsidies to bolster its finances and better channel aid to the needy.

This includes subsidies for the widely-used RON95 petrol, expected to begin later this year.

Malaysia heavily subsidizes the costs of items such as cooking oil, rice, and other fuels, and the expense has ballooned in recent years, straining government coffers.

BNM said recent indicators pointed towards sustained strength in economic activity, supported by resilient domestic spending, better exports, and a pickup in tourist arrivals.

Downside risks to growth include weaker-than-expected external demand and larger declines in commodity production, it said.

"At the current OPR level, the monetary