beyondbrics

Malaysia’s highly-regarded central bank governor Zeti Akhtar Aziz has a tricky call to make this week – whether to raise interest rates for a third time this year or put the monetary tightening process on hold in the face of election rumours and a potential return of the global economic slowdown.

Zeti was the first central bank governor in emerging Asia to raise rates after the global financial crisis – pushing the policy interest rate up by 25 basis points to 2.25 per cent in March on the grounds that emergency monetary measures were no longer needed because the economy was recovering strongly. Rates have since been raised once more, by a further 25 basis points. But now the judgements are getting trickier.

The governor has remained confident about the outlook, telling the FT in an interview in May that economic uncertainty in Europe would not affect Asia’s growth prospects and insisting that Malaysia’s economy “has come on to a stronger growth path now.”

But she must now be feeling the pressure as the US shows signs of rejoining Europe in the economic slow lane. Just in case she had missed of the bad news, Najib Razak, Malaysia’s prime minister, said on Monday that economic growth might slow in the second half of the year because of external factors.

“It is important for us to have a robust domestic demand to spur and balance the economy,” Najib said.

The speech marked a change of tone for the PM, who has been making fairly bullish noises about the economy. It also conflicted with the government’s own full year forecast for the economy, released last month, which predicted growth of 6 per cent – up from an earlier forecast of between 4.5 and 5.5 per cent.

The economy grew at a blistering pace of 10.1 per cent in the first quarter, measured on a year on year basis.

Rumour mongers in Kuala Lumpur say the reason for the PM’s change of tone may be political. His economic reform programme looks stalled as a result of opposition from ethnic Malays, many of whom fear the will lose out to the Chinese and Indian minorities, and a fresh electoral mandate might clear the road blocks.

The government does not have to go to the polls until 2013, but will have an opportunity for a snap election in the autumn. That is when the trial of opposition leader Anwar Ibrahim is expected to conclude, potentially plunging the shaky opposition coalition into disarray if he is imprisoned on charges of sodomy, a criminal offence in Malaysia.

The governor is no-one’s poodle. Quite apart from leading Asia’s monetary tightening cycle earlier this year she was also the Bank Negara official who implemented Malaysia’s controversial capital controls – facing down strong western criticism – in the latter stages of the 1997/98 Asian financial crisis.

It is also true that election rumours swirl fairly constantly in KL, and usually turn out to be wrong. Still, Thursday’s rate setting meeting looks like being more than usually sensitive with so many external issues on the table.

Analysts are split on the bank’s likely decision, with nine out of 16 polled by Reuters forecasting a third rise of 25 basis points to 2.75 per cent when the decision is taken on Thursday. Oh to be a fly on the wall.