Central Banks

Why you shouldn't miss this Malaysian central bank meeting

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For Malaysia watchers, Wednesday's central bank meeting—the last under Governor Zeti Akhtar Aziz—will be closely watched for hints as to who her successor will be, rather than the direction of monetary policy.

Governor Zeti, named Asia's best central banker in 2010 by Euromoney Group affiliate Emerging Markets, will be ending her 35-year tenure with Bank Negara Malaysia (BNM) next month. Her replacement has yet to be named, though according to local media reports, all three of the BNM's deputy governors are in the running for her role.

"It'll be interesting if they name the successor on Wednesday. I assumed they would give the person three months for the transition to take place, so the delay may mean they're going with somebody internal," noted Rahul Bajoria, Barclays economist.

With the next BNM meeting slated for May, the next Governor certainly has large shoes to fill. Zeti leaves behind an economy weighed down by tanking oil prices and an evolving political crisis.

Malaysia is the world's second-largest exporter of liquefied natural gas, according to the U.S. Energy Information Administration, so sinking prices puts pressure on state finances.

As a result, Fitch Ratings expects the ratio of federal government debt to gross domestic product (GDP) to rise modestly to 2017 but to remain below the authorities' 55 percent policy ceiling.

Meanwhile, investor sentiment has been hit by Prime Minister Najib Razak's alleged corruption scandal involving $681 million. Local activists have repeatedly demanded Najib's resignation but the PM has denied any wrongdoing in relation to the matter.

Deposits into Malaysia PM's accounts exceeded $1B
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Deposits into Malaysia PM's accounts exceeded $1B

"The new governor needs to communicate a continuity of independent and effective monetary policymaking while staying on the course on fiscal and economic reforms," said Weiwen Ng, ANZ economist.

Independence from government is key, given the country's long history of graft and opacity, and Zeti assured CNBC in January that the new Governor would not hurt the BNM's credibility.

"There is a governance process in the decision making process. The selection of the new Governor will go through a governance committee of the board made up of private sector individuals," she said in an exclusive interview.

The new Governor also needs to emphasis no reversion to capital controls or pegs, noted Ng.

"As economists, we note that a flexible exchange rate is the appropriate equilibrating mechanism for an economy to nimbly manage exogenous shocks. This is particularly important for very open economies, such as Malaysia. A peg or quasi-peg would certainly limit this flexibility."

Turning to monetary policy, Zeti's successor isn't likely to change the status-quo.

Bank Negara Malaysia (BNM) has kept its overnight policy rate at 3.25 percent since July 2014 and no action is expected on Wednesday either.

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Recent data may seemingly warrant more stimulus, but economists argue that the economic picture is a bit more mixed.

GDP for 2015 came in at 5 percent on year, slowing from 6 percent in 2014. Meanwhile, data for January showed consumer prices hitting a near two-year high and exports falling for the first time in eight months.

"There's not much advantage lower rates can bring right now," explained Barclays' Bajoria.

"First, you have a currency already under pressure so rate cuts would exacerbate that. Moreover, fiscal policy is generally contractionary and household debt is quite high so the impact of a 25 or 50 basis point cut won't be huge."

Last year, the ringgit was Asia's worst-performing currency, down nearly 19 percent against the greenback, while foreign reserves dropped 18 percent.

The new Governor may also find setting monetary policy making more challenging once the Federal Reserve commences its normalization of U.S. interest rates, Ng warned.

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