Malaysian CB likely to keep rate on hold despite easing inflation, slowing GDP

The Central Bank of Malaysia is expected to keep policy on hold, in its meeting today, maintaining the Overnight Policy Rate at 3.25 pct, despite easing inflation and slowed GDP in the recent months.

The April headline inflation number is expected to fall just 2.0 pct, down from the recent peak of 4.2 pct in Feb, 2016. The drop in inflation is partly due to base effect and partially on accounts of the adjustments in domestic pump prices associated with the slump in oil prices. Indeed, the retail fuel prices were cut by at least 4.9 pct in March.

In addition, GDP growth has slowed to 4.2 pct y/y in 1Q16, down from 4.5 pct on year in 4Q15. These factors have already prompted a shift in rhetoric towards a dovish slant. The authority had in fact lowered the statutory reserve requirement (SRR) ratio to 3.50 pct, from 4 pct in February.

However, the only data that stands to support a softer monetary policy is the high household debt-to-GDP ratio. Debt to GDP ratio rose to 89.1 PCT as of end 2015, up from 86.8 PCT in 2014. And lower interest rate will only encourage higher leverages.

Historically, between inflation and financial imbalances, the central bank has a tendency to focus more on the latter. All said, the risk of a surprise move still persists, DBS reported.