MALAYSIA is set to keep its benchmark interest rate unchanged on Thursday, as low inflation and a currency faring better than peers spare policymakers the pressures that prompted a surprise hike in Indonesia last month.
Bank Negara Malaysia will likely maintain the overnight policy rate at 3 per cent, according to all 24 economists in a Bloomberg survey. The central bank last adjusted borrowing costs a year ago, when it increased the benchmark by a quarter point.
Malaysia is under no immediate pressure to follow the lead of Indonesia, that had signaled there won’t be further tightening.
The ringgit has recovered from a 26-year-low reached in February against the dollar, outperforming most of South-east Asia this year after the central bank mounted the currency’s defence. That gives BNM space to support the economy as it assesses the impact of long-awaited subsidy reforms on inflation.
The central bank will probably stick to a neutral tone in its statement, “reflecting that BNM is comfortable with the current policy rate,” said Yun Liu, Asean economist at HSBC Holdings.
Here’s what to watch out for in Thursday’s statement at 3 pm local time:
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Inflation outlook
While still benign, price pressures are at risk of flaring up this year amid upcoming cuts to fuel subsidy. That view was reflected in the central bank’s wide inflation forecast range of between 2 per cent to 3.5 per cent for 2024.
The government said it will push ahead with unwinding blanket petrol subsidies and channeling the subsequent savings toward targeted assistance. The exact timing and mechanism will be the main risk to inflation in the coming months, according to Lavanya Venkateswaran, senior Asean economist at Oversea-Chinese Banking Corp in Singapore.
Prime Minister Anwar Ibrahim already said he expects inflation to rise slightly after announcing a record wage bump for civil servants starting December. More immediately, Malaysians may withdraw up to 10 per cent of their retirement funds starting from May.
This could lead to outflows of anywhere between RM20 billion (S$5.7 billion) and RM30 billion from the Employees Provident Fund in the first year, according to AmInvestment Bank Bhd in a research note.
Ringgit support
Malaysia’s interest rate remains at a record differential to the Federal Reserve’s, weighing on the local currency which has depreciated since BNM’s last rate meeting. Malaysia’s reserves fell 0.5 per cent to US$112.8 billion at the end of last month from mid-April.
Still, there are some positive signs. Higher oil prices contributed to demand for the the oil exporter’s currency, helping relieve pressure on the ringgit.
Growth trajectory
Malaysia’s economy quickened by the most in a year during the first quarter, advance estimates showed, signaling that a firmer recovery is underway.
The country’s external position is set to improve in 2024 on increased tourism spending and a rebound in tech exports, according to analysts at Malayan Banking Bhd. Underlying economic conditions imply pressure would be reduced for BNM to cut rates, they added.
The central bank expects gross domestic product to expand between 4 per cent and 5 per cent this year after coming in below expectations in 2023. BLOOMBERG
