Bank Negara Malaysia keeps key interest rate on hold, likely to maintain ‘neutral’ tone in 2018

Malaysian central bank, Bank Negara Malaysia, kept its Overnight Policy Rate (OPR) on hold at 3.25 percent today. The accompanying statement comes across as “neutral”, though it notes downside risks on the external front from trade tensions, volatile financial markets, U.S. policy normalization and capital outflow pressures in emerging markets, noted ANZ in a research report.

Malaysian growth environment, since the July meeting, has become less favorable. The sequential GDP growth of 0.3 percent in the second quarter was the lowest since the first quarter of 2013, taking the annual growth rate down to 4.5 percent year-on-year from 5.4 percent in the previous quarter, well below expectations. BNM has since lowered their 2018 growth projection to 5 percent from 5.5 to 6 percent. Moreover, clarity on the on-going review of infrastructure projects and the new government’s fiscal plans will only become clearer when the Budget is tabled in November.

The BNM has maintained in recent statements that the global growth is continuing, although with some divergence throughout economies. Nevertheless, it stated that it perceives “signs of slower momentum” in today’s statement. Also, downside risks on external from trade tensions were noted, along with volatile financial markets, U.S. policy normalization and capital outflow pressures in emerging markets.

The central bank, in its statement, acknowledged the moderation in Malaysian growth in the second quarter, but linked it to supply disruptions in the mining and agriculture sectors. BNM believes that growth might be underpinned by robust private sector activity, with consumption underpinned by strong labor market conditions, even as the ‘tax holiday’ effect fades.

Investment is also deemed to stay supported by capacity growth and automation, particularly in the export-oriented sectors. Nevertheless, BNM understands that reduced support from public spending might start to be a drag on growth as the government looks to reprioritise expenditure. The central bank expects the economy to stay on a stable growth path. Moreover, BNM expects underlying inflation to stay relatively stable. Headline inflation is likely to move higher as the Sales and Services Tax get fully implemented.

“We expect BNM to maintain its ‘neutral’ tone and remain on hold for the rest of the year and over the first half of next year. The central bank will remain accommodative, but is unlikely to assume a dovish stance and jeopardise the relative resilience of the ringgit”, added ANZ.