Backed by a resilient economy, Malaysia’s central bank kept its benchmark interest rate unchanged for a second straight meeting, even as other central banks in the ASEAN region have been slashing their key rates recently.
The central bank of Malaysia maintained the overnight policy rate (OPR) at 3%, which was in line with market expectations.
In an earlier survey of 24 economists by Bloomberg, 16 correctly forecast the decision, while the rest had predicted a 25 basis-point (bps) cut to 2.75%.
Bank Negara Malaysia (BNM) has left the OPR unchanged in its Monetary Policy Committee (MPC) Meeting yesterday and earlier in July.
BNM said yesterday that the stance of Malaysia’s monetary policy remains accommodative and supportive of economic activity.
It also added that domestic drivers of growth, alongside a stable labor market and wage growth, are expected to remain favorable to economic activity.
On the external front, BNM counts on Malaysia’s diversified exports to partly mitigate the impact of softening global demand.
The central bank reduced the interest rate from 3.25% to 3.00% in May this year – its first rate cut since July 2016 and one of the first in Asia. Being an early mover has its advantages.
“May’s preemptive, pro-cyclical ‘get ahead of the curve’ cut that was received positively by the market appears to have paid dividends, offering more scope for the BNM to hold off for now,” said Stephen Innes, an Asia-Pacific market strategist at AxiTrader Ltd. in Bangkok. “BNM are content to keep their powder dry for a rainier day.”
Meanwhile, the central bank stated that headline inflation is expected to remain low. This is due to the delayed impact of consumption tax policy changes (from the broader Goods and Services Tax to the narrower Sales and Services Tax), bleak outlook on oil prices, and policy measures to rein in food prices.
External risks – most notably the US-China trade war – have remained a salient factor for Malaysia. Granted, the country may be benefiting from businesses relocating operations from China to Southeast Asia amid the trade war. Nevertheless, the greater risk of a global recession could undermine investor confidence.
Alex Holmes, an Asia economist with Capital Economics, believes that the Malaysian central bank is likely to resume easing as soon as its next meeting.
“With growth set to slow and inflation likely to be subdued, further easing looks likely,” Holmes wrote in a research note. “We are sticking with our forecast that interest rates will be cut by a further 25 bps later this year, most likely at the BNM’s next meeting in early November.”
In the ASEAN region, central banks in Thailand, Indonesia, and the Philippines cut their benchmark rates in August, as global growth continued to slow down amid the escalating US-China trade war. Just today, Vietnam’s central bank announced it is cutting several interest rates.
Bank Negara Malaysia – the central bank of Malaysia. Picture credit: Bernama