Malaysia rates left unchanged, c.bank ready to act

KUALA LUMPUR (Reuters) - Malaysia's central bank left its key interest rate unchanged on Friday, as expected, but signaled it was ready to ease policy to shore up its trade-reliant economy as the global outlook deteriorates.

Bank Negara Malaysia kept its overnight policy rate unchanged at 3.50 percent, the same level it has been at since April 2006.

"In the face of diminishing inflationary pressures, and in the event of heightened downside risks to growth, the bank will take swift monetary policy action to provide support to the economy," Bank Negara said in a statement after its regular policy meeting.

The government says Malaysian rates are low enough to spur growth but some analysts say there may be an easing as the global economy grapples with what is expected to be its worst financial crisis since the Great Depression.

"If growth is weak, then in the first or second quarter Bank Negara could lower the policy rate, but I do not see it happening any time soon," said Gundy Cahyadi, an economist at IDEAglobal.

Annual inflation eased slightly in September to 8.2 percent, official data showed on Friday, roughly in line with market expectations for a rate of 8.3 percent.

Inflation stood at 8.5 percent in August and July, which was then the highest rate since December 1981.

Malaysian growth is likely to slow as exports ease and falling global energy prices mean the oil exporter's revenues would probably fall and limit its ability to pump prime the economy.

The government announced a plan to stabilize its economy this week but the package did not contain any major measures.

Easing inflation would give the central bank room to cut rates for the first time since 2003, economists have said.

"The assessment is that inflation has now peaked and is expected to moderate into 2009," the central bank said.

"Lower cost pressures and moderating domestic demand are expected to reduce inflation in 2009."

Monthly inflation data was expected to fall to below 4 percent by mid-2009, Bank Negara Governor Zeti Akhtar Aziz said last month.

Financial markets expect Malaysia to lower pump prices of fuel soon, as global energy prices ease.

The Southeast Asian economy has kept rates on hold for the last 2-1/2 years despite a spike in inflation, drawing criticism from some economists who said the central bank had been slow to act.

"I think interest rates should be where they are," Domestic Trade Minister Shahrir Samad said on Friday.

"In July we were told we were behind the curve but now I think we are proving the rest of the world that actually we are ahead of everybody."

The minister also said any cut in Malaysian fuel prices would be announced at end-October or early November.

The government will lower its 2009 economic growth forecast owing to the weaker global outlook but it has not announced the new target.

(Additional reporting by Loh Li Lian; Editing by Chris Pizzey)