[KUALA LUMPUR] Malaysia’s central bank maintained its benchmark interest rate at 3 per cent on Thursday (May 9), choosing not to follow the recent rate hikes by other South-east Asian countries.
The decision was widely expected – all 30 economists in a recent Reuters poll projected that the central bank would keep the overnight policy rate (OPR) steady at 3 per cent.
While the Philippines, Thailand and, most recently, Indonesia have raised their interest rates to support their tumbling currencies, Malaysia has held the OPR unchanged since its quarter-point hike in May last year.
Bank Negara said the decision was in view of benign inflation and a rosy growth outlook, underpinned by strong domestic expenditure and a recovering global economy.
Most economists predicted the OPR will stay unchanged for the rest of the year, as they observed that the rate hike might not alleviate currency volatility.
HSBC Global Research Asean economist Yun Liu said a rate hike was not a “panacea” for currency volatility. The recent experiences of some Asian central banks suggest that raising rates does not necessarily counteract the strengthening of the US dollar.
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In a note on Thursday, OCBC senior Asean economist Lavanya Venkateswaran said Bank Negara remained “comfortable” with current monetary policy settings, as growth was expected to improve with manageable inflationary pressures.
She said: “Malaysia’s central bank’s assessment on growth, inflation and currency (was) broadly unchanged from its previous meeting on Mar 7 this year. We maintain our forecast for Bank Negara to keep OPR unchanged in 2024.”
The central bank said the monetary policy stance, at the current OPR level, remained supportive of the economy and aligned with its view of inflation and growth prospects.
It added: “Global trade is expected to strengthen further as the global tech upcycle gains momentum. While global headline and core inflation continued to edge downwards in recent months, the pace of disinflation has slowed in some advanced economies.”
The central bank also expressed confidence in Malaysia’s economic outlook, noting that recent indicators pointed towards robust economic activity in the January to March period. This was driven by resilient domestic expenditure and a positive rebound in exports.
The government estimated that the country’s economy will expand 3.9 per cent in the first quarter, compared with the same period last year.
“Tourist arrivals and spending are also poised to rise further. Continued employment and wage growth remain supportive of household spending,” said Bank Negara.
Inflation remains benign
The central bank expected inflation to remain moderate, reflecting stable demand conditions and contained cost pressures. However, it cautioned that the policy shifts in subsidies, global commodity prices and financial market development will affect the inflation outlook.
Official data from March showed that consumer inflation rose by a milder-than-expected 1.8 per cent year on year, owing to slower increases in the prices of food and healthcare.
Bank Negara estimated that, after accounting for the potential impact of subsidy rationalisation, headline inflation will average between 2 and 3.5 per cent this year. Core inflation, meanwhile, was projected to average between 2 and 3 per cent.
Risk of a late 2024 hike
Standard Chartered Bank economists Edward Lee and Jonathan Koh, however, predicted that the recent policy changes will lead to demand-driven inflation, increasing the risk of an interest rate hike in late 2024.
One significant policy shift is the restructuring of Employees’ Provident Fund accounts – allowing contributors to opt for flexible accounts with emergency withdrawal options. This change could lead to an estimated RM25 billion (S$7.1 billion) in withdrawals.
Other developments include a potential salary increase of more than 13 per cent for civil servants from December this year, and the removal of a blanket fuel subsidy.
The central bank stressed that the current value of the ringgit does not accurately reflect Malaysia’s economic fundamentals and growth prospects.
Nonetheless, external factors such as shifting expectations of major economies’ monetary policy paths and ongoing geopolitical tensions have led to heightened volatility in capital flows and exchange rates across the region.
The central bank affirmed that the coordinated efforts by authorities and government-linked companies have started to stabilise the ringgit, mitigating some of the pressure.
It said: “Bank Negara will continue to manage risks arising from heightened financial market volatility. Over the medium term, domestic structural reforms will provide more enduring support to the ringgit.”
On Thursday, the ringgit was trading at RM4.747 against the US dollar, having depreciated more than 6 per cent since May 9 last year, when it stood at RM4.43 against the greenback.
