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Bank Negara Malaysia keeps interest rate on hold, likely to stand pat through 2019

Bank Negara Malaysia today kept its Overnight Policy Rate on hold at 3 percent, as was widely expected. May’s rate cut was intended to “preserve the degree of monetary accommodativeness” in the midst of “some signs of tightening in financial conditions” according to the press release.

The central bank stated that the economy expanded within expectations in the first quarter. It retained the 2019 GDP forecast range of 4.3 percent to 4.8 percent. Nevertheless, rather than the previous “there are downside risks” the latest wording is “subject to downside risks” arising from uncertainties in the global and domestic environment, trade tensions and low commodity prices. According to an ANZ research report, the language is less bearish that before.

BNM said that the headline inflation is “projected to rise in the months ahead as the effect of the changes in consumption tax policy lapses”. Nevertheless, the central bank maintained that average headline inflation in 2019 is expected to be “broadly stable compared to 2018”. BNM acknowledged that the trajectory of headline inflation will depend on global oil prices as well as on “the timing of the lifting of the price ceiling on domestic retail fuel” prices. The measure is expected to be delayed to the end of the year instead of 1 July. Therefore, this reduced the upside risk to inflation.

Malaysia faces challenges on both the external and domestic front. However, a low base in the second quarter of last year and some re-stocking in inventories should help prop up the second quarter of 2019 growth number. The Malaysian economy is expected to grow 4.4 percent in 2019 as a whole.

“Our view is that that barring a substantial deterioration in growth, BNM will remain on hold through 2019. The current OPR (3.00 percent) is at the lower end of the policy range outside of crisis periods”, added ANZ.

By Aditi Awati
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