Bank Negara Malaysia maintains interest rates amid economic growth focus, cautious monetary policy approach

MALAYSIA: Bank Negara Malaysia (BNM) left the overnight policy rate on hold at 3% for the third consecutive meeting on 7 September.

The decision reflects the central bank’s renewed emphasis on supporting economic growth.

According to the latest monetary policy statement, it believes that current monetary policy stance “remains conducive to sustainable economic growth amid price stability”.

BMI, a unit of Fitch Solutions forecasts BNM to keep rates on hold at 3% for the rest of the year and through end-2024.

“We continue to expect BNM to keep its overnight policy rate on hold at the next meeting on 6 Nov on the back of steady downward trajectory on domestic inflation, with headline inflation easing from 2.8% year-on-year (y-o-y) in May to 2% in July 2023.

“As compared to its regional peers, the BNM’s cumulative 125-basis point hike has been relatively modest, and therefore indicates a less dire need for the central bank to cut rates too soon.

“The improved inflationary backdrop implies that Malaysia’s real policy rate is now in positive territory, which since 2006 has typically coincided with the end of the tightening cycle. As such, we believe that the current policy stance is sufficient to keep inflation in check and that the central bank will remain on hold for now,” it said in a statement today.

The research house has lowered its end-2023 inflation forecast to 1.8%, from 2% previously due to faster-than expected easing of prices.

Accordingly, it has adjusted it forecast for inflation to average 2.6% in 2023 from 2.7% previously, which marks a significant slowdown from 3.4% in 2022.

BNM will be mindful of loosening monetary policy too soon

BNM will exercise caution and restraint when considering any actions to loosen its monetary policy, it said.

“The Malaysian ringgit has come under significant pressure, having weakened by 5.9% against the US dollar year-to-date, positioning it to be one of the weakest currencies in the region.

“A swift return to monetary loosening will therefore run the risk of exacerbating further downside pressure on the ringgit, at a time when global monetary conditions remain restrictive,” it said.

Growth to slow sharply in 2023

The research arm’s interest rate forecast further implies that BNM will take a backseat in tiding the Malaysian economy through 2023’s slowdown.

The economy had already slowed from 5.6% y-o-y in the first quarter of 2023 (1Q’23) to 2.9% in the second quarter of (2Q’23) – the slowest pace since the third quarter of 2021 (3Q’21).

“While we expect growth to pick up in the second half of 2023 (2H’23), our prevailing forecast for Malaysia’s real GDP growth of 4% in 2023 sits at the lower end of the central bank’s 4% – 5% target, and falls short of the pre-pandemic average (2015-2019) of 4.9%,” it said.

Rebounding gradually

In its monetary policy statement, the BNM anticipates that a stronger-than-expected recovery in the electronical & electronic (E&E) downturn will bode well for the economy.

Indeed, there are initial signs of a turnaround within Malaysia’s export sector.

E&E exports, which account for more than 40% of total exports, have most recently risen by 7.4% y-o-y in July 2023, a marked improvement from a 6.4% contraction in April.

“If sustained, a rebound in Malaysia’s export oriented economy will reduce the pressure for the central bank to cut rates,” it said.

Risks to outlook

Although the research house have made forecasts about interest rates, there are factors or events in the environment that make it more probable for interest rates to rise than to remain stable or decrease.

“Risks to our interest rate forecasts are skewed slightly to the upside. Should the ringgit face further depreciatory pressure, this could prompt the central bank to raise rates further to maintain real interest rate differential vis-à-vis the US.

“Additionally, we highlight upside risks to inflation as it is subject to changes to subsidies and price control, which could in turn impact commodity prices.

Interest rate hike could be due to various economic factors, such as inflationary pressures, changes in monetary policy, or shifts in market conditions that suggest upward pressure on interest rates is more likely.