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KUALA LUMPUR, Jan 19 (Reuters) - Malaysia's central bank kept its key rate unchanged at 3.00 percent on Thursday as policy makers elect to sit tight in the face of a fragile ringgit currency and uncertainty around U.S. policies under incoming president Donald Trump.
Bank Negara Malaysia (BNM) said in a statement that private sector activity will underpin the economy, and latest indicators point to continued growth in the fourth quarter of 2016.
"Going forward, private sector activity will remain the key driver of growth," the bank said in the statement.
"Overall, the economy remains on track to expand as projected," it said.
All 11 economists polled by Reuters forecast BNM to hold its key rate steady.
Investors worry a destabilising fall in the currency could knock the economy just when it has started to pull ahead after slowing for well over a year. That anxiety has been fed by a recent flight of capital out of Malaysia and other emerging markets on bets a Trump administration will boost fiscal spending and accelerate U.S. interest rate increases.
The ringgit tumbled to 19-year lows at the start of this month, so Thursday's on-hold policy decision came as no surprise to markets as a cut to follow BNM's July easing would have exposed the ringgit to more pressure.
BNM said the ringgit has seen reduction in volatility since the sharp adjustments experienced towards the end of 2016.
However, global economic uncertainties may trigger "bouts of volatility" in regional financial and foreign exchange markets, it said. The ringitt was trading at 4.4500 on the dollar on Thursday, up around 0.8 percent for the year but still down over 10 percent since July 2016.
Prior to July's unexpected easing, the rate had been held steady for seven years at 3.25 percent.
"Clearly, the BNM opted for a more prudent choice despite low inflation on the face of a more hawkish Fed, expected higher inflation and an improving commodity cycle, helping export revenue," said Trinh Nguyen, senior economist for investment bank Natixis based in Hong Kong.
"As Malaysia has high exposure to foreign portfolio investment, especially in fixed income, it was a wise move to hold and watch how external conditions unfold," she said.
BNM said headline inflation averaged 2.1 percent in 2016 and is expected to average higher in 2017, amid the prospect of higher global oil prices.
Malaysia's economy has been hobbled over the past couple of years by slumping oil and gas prices, slowing demand from top trade partner China, and a financial and political scandal at state-fund 1Malaysia Development Berhad (1MDB).
BNM was widely expected to deliver a second interest rate cut before the end of last year, but the sell-off in the ringgit appeared to have put paid to such a move.
In November, the central bank stepped in to discourage ringgit trade in the non-deliverable forwards (NDF) market, and later introduced measures to boost onshore ringgit trade.
The measures, however, could not prevent international reserves from shrinking by about $4 billion, from $98.3 billion in Nov. 15 to $94.6 billion as of Dec. 30, with forex reserves being depleted to defend the beleaguered ringgit.
Prime Minister Najib Razak has said he expects the economy to pick up pace this year, after a cooldown for five straight quarters was arrested in the September quarter with 4.3 percent growth.
(Reporting by Praveen Menon; Editing by Shri Navaratnam)