Malaysia: BNM stands pat in March, sounds slightly more cautious
At its 7 March meeting, the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) decided to maintain the Overnight Policy Rate (OPR) unchanged at 3.25%, following the 25-basis point hike delivered at its previous meeting in January. The recent weakening in underlying inflation dynamics and a further strengthening of the ringgit against the U.S. dollar warranted the Committee’s decision.
The Bank noted in its communiqué that growth was expected to remain positive this year, notwithstanding a potential resurgence of financial market volatility and the emergence of global trade protectionism. It further commented that economic growth in Malaysia would benefit from upbeat global demand dynamics and spillover effects from the external sector into the domestic economy.
Authorities were, however, less sanguine regarding the inflation outlook. The BNM stressed that it expects headline inflation to fall this year, while it sees core inflation moderating due to “improving labor productivity and ongoing investments for capacity expansion”. In January, the Bank had expected core inflation to remain moderate, thus suggesting a more cautious stance regarding price pressures. That said, the Bank reiterated that oil price developments will be a source of uncertainty in the inflation outlook.
Indeed, inflation moderated to 2.7% in January from 3.5% in December, below the Bank’s target range of 3.0%–4.0%. Although a base effect was partially to blame, a stronger ringgit also helped limit price pressures. Against this backdrop, a continued appreciation of the currency—which our panelists currently forecast—warrants the government’s more cautious assessment of inflation. Nonetheless, inflation is expected to accelerate in H2 2018 on the back of robust pre-election spending and dwindling slack in the domestic economy, which would provide the BNG with enough leeway to increase rates for a second time this year.
Nonetheless, the above scenario is subject to multiple risks. The ringgit could behave less favorably were the Federal Reserve to hike interest rates more than currently signaled, the probability of which is on the rise. Similarly, upside surprises to growth—a significant possibility ahead of general elections this year—could remove slack in the domestic economy at a faster-than-expected pace, igniting stronger inflationary pressures. This could see the BNG accelerating its pace of monetary normalization.
The Committee is expected to hold its fire in upcoming meetings as it attempts to look past election-induced distortions. A small moderation in GDP growth in Q4 over the previous quarter further reinforces the Bank’s case for maintaining the current policy stance, while increased fiscal restraint after the general elections are held should help decrease domestic price pressures. The Bank’s omission in its statement of any mention to its policy stance being accommodative—which was implicitly referenced in January—also signals that the BNM sees limited room for additional hikes.