Bank Negara Malaysia keeps policy rate on hold, likely to maintain neutral tone for rest of 2018

Malaysian central bank, Bank Negara Malaysia kept its overnight policy rate on hold at 3.25 percent. The policy statement took note of the likely repercussions of an additional intensification in global trade tensions and monetary policy normalization led by the U.S. Fed.

Today’s central bank’s decision is the first under newly-appointed Governor Nor Shamisiah and is also the first one since the Pakatan Harapan (PH) government was sworn in. Much has changed globally as well as domestically since the central bank raised its OPR in January 2018. The unexpected alteration in government has led to major changes to fiscal policy, while downside risks to the global outlook has increased because of heightened US-China trade tensions. The policy statement acknowledged some of these developments and noted that the balance of risks for the Asian economies has also skewed to the downside.

According to the policy statement, Malaysian growth is set to be on a firm footing, with net exports providing an impetus in the first half of 2018. The central bank continued to be optimistic about sustained growth later in 2018 as policy uncertainty clears. Private spending is likely to stay solid at least through the third quarter of 2018, while investment is likely to be on track given ongoing infrastructure projects and capacity growth in export industries. No downside risks from the changes to fiscal policy were indicated.

The most significant developments from a monetary policy perspective are soft inflation and the prospects for an additional moderation in the months ahead, which BNM considers “transitory”. Consumer price inflation came in at an average of 1.7 percent year-on-year in the January to May period and is expected to have further eased since June, stated ANZ in a research report.

“We expect BNM to maintain its ‘neutral’ tone and remain on hold for the rest of the 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.