UPDATE 1-Malaysia holds key rate; says current level supportive, inflation contained

(Analyst comment, details)

By Anuradha Raghu

KUALA LUMPUR Jan 31 (Reuters) - Malaysia's central bank kept its key interest rate unchanged at 3.00 percent in its first monetary policy decision of the year, as expected, saying that the current rate level is supportive of the economy while inflation remains contained.

Eighteen economists polled by Reuters had expected the overnight policy rate to be kept steady for the 10th consecutive time, with the earliest hike possibly taking place only in the second half of the year as inflationary pressures pick up.

Bank Negara also said it expected a robust economic expansion in the fourth quarter which was likely driven by "sustained domestic consumption and investment activity, with some improvements in the external sector."

The country's fourth quarter GDP results will be released on Feb. 20.

"The monetary policy committee (MPC) considers the current stance of monetary policy to be supportive of the economy while inflation remains contained," Bank Negara said in a statement.

"In addition to domestic conditions, the MPC will continue to carefully assess the global economic and financial developments and their implications on the overall outlook for inflation and growth of the Malaysian economy."

Central banks in Thailand, Indonesia and the Philippines held their benchmark policy rates steady recently, saying inflation was currently manageable while growth was expected to remain resilient as strong domestic demand offsets the impact of the sluggish global economy.

But Asia's third-largest economy India cut key rates for the first time in nine months on Tuesday to help support an economy set to post its slowest annual growth rate in a decade. The Reserve Bank of India added caution of further easing as it waits to see how the government's upcoming budget aims to curb a bloated fiscal deficit.

INFLATION TAME FOR NOW

Malaysia's annual inflation rate in December slowed to 1.2 percent, its lowest pace since February 2010, while full-year inflation halved to 1.6 percent from a 3.2 percent in 2011.

Bank Negara said it expects inflation to pick-up in 2013 but to remain modest, driven by costlier food and several domestic factors. The bank expects pressures from global commodity prices to be kept in check.

The Southeast Asian country enjoys one of the lowest inflation rates in the region thanks to government subsidies on essential items ranging from cooking oil to sugar.

But economists expect price pressures to increase in the second half of the year in line with an expected global economic recovery, and as the government gradually removes subsidies to cut a budget deficit which has ballooned to be among Asia's biggest.

Some analysts expect the Malaysian government will also hike fuel prices and electricity tariffs after a general election which must be called by end-April.

"The current subsidies programme may not be sustainable in the long term if Malaysia seeks to achieve fiscal sustainability," said DBS economist Irvin Seah in Singapore.

"That could imply that there may be a need to cut back on subsidies going forward, and that will sure bring about higher inflation."

Seah added that the rollback of subsidies, mostly likely after the elections, will not be drastic but instead be addressed with a calibrated approach.

The upcoming polls are predicted to be the most closely fought elections following the ruling coalition's dismal performance in 2008 where it lost a two-thirds majority in parliament for the first time.

The trade-dependent country's economy kept up its surprisingly robust growth in the third quarter of 2012, beating expectations with an annual expansion of 5.2 percent as strong domestic demand and investment made up for faltering exports.

Exports in November were stronger-than-expected, buoyed by year-end festivity demand from the United States and China. Economists, however, warn that Malaysia's exports could see an "erratic performance" in 2013, while benefiting overall from the expected turnaround in the global economy.

"Malaysia certainly has benefited in terms of the recent pick-up in exports and we expect that to continue to keep overall GDP growth at a healthy level of about 5 percent throughout 2013," added Seah. (Reporting by Anuradha Raghu; Editing by Kim Coghill)