Malaysia maintains 3% key rate as expected, amid easing inflation and growth
Kuala Lumpur MALAYSIA’S central bank maintained the overnight policy rate (OPR) at 3 per cent on Thursday (Jul 6), with inflation easing and the country’s economic growth moderating in recent months.
The decision was widely expected by economists as the country’s inflation has shown signs of cooling. In a Reuters poll of 25 economists, 22 had expected Bank Negara to hold the policy rate unchanged; the remaining three anticipated another 25-basis-point hike to 3.25 per cent.
Economists said pausing the rate hike showed the central bank is more sanguine about the country’s growth and inflation outlook. Nevertheless, the decision could continue to put pressure on ringgit currency movements due to the widening gap between OPR and federal funds rate (FFR).
In a statement on Thursday, Bank Negara reiterated that at the current OPR level, the monetary policy stance remains “slightly accommodative and supportive of the economy”.
The central bank noted that Malaysia’s economy has expanded at a more moderate pace in recent months after strong first-quarter growth of 5.6 per cent, weighed down mainly by slower external demand.
Trade figures have been on a downtrend. In the first five months of this year, the country’s exports fell 2.3 per cent to RM579.4 billion (S$168.2 billion). Imports declined 1 per cent to RM487 billion.
However, robust domestic demand – anchored by strong household spending and favourable labour market conditions – will continue to fuel growth, said Bank Negara.
OCBC senior Asean economist Lavanya Venkateswaran said Bank Negara’s decision and “less hawkish” tone were expected after the central bank’s surprising move to raise the OPR by 25 basis points in May this year.
“This is justified, in our view, not just by external factors including the continued hawkish drumbeat of global central banks but also domestic factors – sticky core inflation and inflationary impact of potential changes in the government’s subsidy policies,” she said in a report on Thursday.
OCBC expects Bank Negara to maintain the OPR at 3 per cent till end-2023, unless there are “overly hawkish global central bank moves” or any drastic changes in the country’s subsidy policies.
UOB senior economist Julia Goh said Bank Negara’s decision is in line with most regional central banks which started pausing rate hikes from the second quarter this year, while some countries such as Vietnam and China have been cutting interest rates to boost economic growth.
“(In view of global developments) coupled with weaker economic data points, lagged effects of past rate hikes and easing inflation, we think the window for another OPR hike may have closed,” said Goh in a report co-authored with economist Loke Siew Ting.
MIDF Research did not discount the possibility of another rate hike of 25 basis points in the second half of 2023 if the domestic economy continues to expand at a stronger-than-expected pace.
Malaysia’s headline and core inflation have been easing. As food and transport costs grew more slowly, headline inflation eased further to 2.8 per cent in May, the lowest since May 2022.
Core inflation, which reflects underlying demand, moderated marginally to 3.5 per cent in May, but remains elevated due to robust domestic demand.
Bank Negara expects both headline and core inflation to trend lower in the second half of the year. Still, it noted upside risks such as persistent core inflation, changes in government policies on subsidies and price controls, as well as global commodity prices and financial market developments.
“Globally, headline inflation continued to moderate, but core inflation remains above historical averages. For most central banks, the monetary policy stance is likely to remain tight,” said Bank Negara.
It highlighted several downside risks for global growth: slower growth in major economies, higher-than-expected inflation, escalating geopolitical tensions, and a sharp tightening in financial market conditions.
MIDF Research and UOB raised concerns that the widening gap between OPR and FFR may affect near-term ringgit movement. Currently, the interest-rate differential of OPR and FFR is at 2.25 per cent.
UOB’s Goh said a higher FFR and ringgit depreciation will complicate the OPR outlook as a prolonged period of ringgit weakness may lead to businesses passing on the additional costs to consumers, which will in turn affect demand.
In a note on Tuesday, forex broker company OctaFX wrote that it expects the ringgit to continue depreciating to a fresh low of RM4.75 against the US dollar, if Bank Negara leaves the rate unchanged, as investors in Malaysia are taking a risk-off approach in view of the higher FFR (currently at 5.25 per cent).
As at 6 pm on Thursday, the ringgit stood at RM4.66 against the greenback, nearly a 6 per cent decline year to date. Against the Singapore dollar, the ringgit fell more than 5 per cent to RM3.45 from RM3.28 on Jan 1, 2023.