REFILE-UPDATE 1-Malaysia's holds key rate amid fresh COVID-19 lockdowns

(Corrects to remove extraneous word “nearly” from paragraph 5)

KUALA LUMPUR, July 8 (Reuters) - Malaysia’s central bank kept its benchmark interest rate unchanged on Thursday amid an extended lockdown imposed to contain a surge in COVID-19 infections.

Bank Negara Malaysia (BNM) held its overnight policy rate at 1.75%, as expected by 12 of 13 economists polled by Reuters.

The central bank said while better-than-expected economic activity in the first quarter this year continued into April, the reimposition of COVID-19 containment measures will dampen growth momentum.

The outlook remained tilted to “significant downside risks”, due mainly to factors that could lead to tighter restrictions or a delay in lifting curbs, or any slowdown in the global recovery, BNM said in a statement.

Malaysia is battling a fresh surge in coronavirus cases which has pushed up its tally of total infections to more than 800,000 since the pandemic began, the third highest in Southeast Asia behind Indonesia and the Philippines.

The government imposed a nationwide lockdown in June, though restrictions have been partially relaxed in some states. The capital Kuala Lumpur and surrounding areas, among the worst-hit regions, remain under strict curbs.

Last week, Prime Minister Muhyiddin Yassin announced a $36-billion aid package to help cushion the economic impact of the lockdown.

BNM said the continued operation of essential economic sectors will partly mitigate the impact of curbs, while policy support packages will alleviate the financial burdens of households and businesses.

Favourable external demand conditions and the progress of the country’s vaccination programme will also support growth recovery into next year, it said.

About 9% of Malaysia’s population have been fully vaccinated, government statistics show.

Alex Holmes, Asia economist for Capital Economics, said COVID-19 curbs will continue to be a major economic headwind in the next few months, despite a recent increase in vaccination rates.

“Given the poor economic outlook we think rates will be left at their current low levels until at least end-2022,” he said in a note.

The central bank had slashed rates by 125 bps in 2020 in response to the pandemic. But the economy still shrank 5.6% last year, its worst annual performance since the Asian Financial Crisis.

In the first quarter of 2021, gross domestic product contracted 0.5% year-on-year, less than expected, amid a recovery in exports and domestic spending.

The government expects the economy to rebound by 6% to 7.5% this year. The finance ministry, however, has said its target may be revised downwards following the latest round of lockdowns, according to media reports. (Reporting by Rozanna Latiff; Editing by Kim Coghill)