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August 21, 2008

Malaysia central bank chief to stay put

Malaysia's central bank denied on Thursday that its chief Zeti Akhtar Aziz was to resign amid pressure from markets to deliver an interest rate hike for the first time in more than two years, reported Reuters.

Malaysia, alone in Southeast Asia, has held rates in the face of rising inflation and that has prompted some analysts to question its independence from the government which wants to avoid hikes at a time of political turmoil and slowing growth.

Its benchmark rate stands at 3.5 percent and has been there since April 2006.

"It's definitely not true," a spokesman for Bank Negara Malaysia said in response to a question about market rumours Zeti was to quit.

Lack of action from the central bank and the prospect of political instability as opposition leader Anwar Ibrahim challenges the 50-year rule of the governing coalition has hit Malaysian assets.

The ringgit currency has fallen by almost one percent against the dollar this year, underperforming regional peers such as Singapore, despite a healthy current account surplus which has been bolstered by surging commodities prices.

"Bank Negara Malaysia's surprise decision not to hike despite historically high inflation rates and fast-rising core inflation, sets Malaysia as the least responsive central bank in the region and brings central bank credibility and independence into serious question," HSBC said in a research note after the last policy meeting in July.

Investors will be watching consumer price inflation data on Friday and a Reuters poll this week forecast July CPI would be up 7.8 percent from a year earlier, the steepest rise since January 1981, and on the heels of June's 7.7 percent.

Growth in Malaysia is set to slow in 2008 to 5 percent, according to the most recent government estimates, from an original forecast of 5-6 percent and 6.3 percent in 2007.

With a crucial by-election on Aug. 26 in which Anwar may return to parliament after a 10-year absence due to imprisonment for corruption and sodomy, the government may not want to see a rate rise at a time when consumers are already suffering higher inflation and growth prospects are weakening.

"Right now it is a testing time when the business of a central bank should be clear with inflation, but most central banks in Asia have one eye on growth as well," said an economist at a foreign bank who declined to be named due to political sensitivities.

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