BNM keeps overnight policy rate on hold

The Malaysian central bank kept its overnight policy rate unchanged at 3.25% at its meeting today. However, the balance of risks for the country’s domestic and external demand is tilted on the downside in the midst of tighter credit conditions and fiscal tightening. This gives leeway for the central bank for likely easing later in 2016, noted ANZ in a research report.

Bank Negara Malaysia in its monetary policy statement said that global economic growth continues to take place, although at a slower rate, throughout major developed and emerging economies in Q1 2016. Domestic demand continues to mainly contribute to Asian economic growth amidst constant weakness in external sector. According to the central bank’s press release, “volatility in the international financial markets has receded and investor sentiments have improved, although this is susceptible to policy and market developments. Looking ahead, structural issues and geopolitical developments will continue to constrain growth of the global economy despite the highly accommodative monetary conditions”.

For Malaysia, the central bank expects economic activity to rebound, while domestic demand is likely to remain as the important growth driver going forward. Private consumption is likely to further grow, underpinned by constant growth in employment and wages. According to the central bank, overall investment activity in the country is likely to be continuously supported by the execution of infrastructure projects and capital expenditure in the services and manufacturing sectors. BNM expects the Malaysian economy to grow 4%-4.5% this year.

However, the balance of risks this year is tilted towards disappointing growth and fiscal slippage, according to ANZ. It expects inflation to trend lower for the remainder of 2016. Lower oil prices indicate the country will face considerable fiscal and growth headwinds, noted ANZ. Therefore, there is a risk of the central bank lowering the policy rate if the outlook of economic growth falls considerably, added ANZ.