Malaysia is expected to leave its benchmark interest rate unchanged Thursday, as cooling inflation gives the central bank some breathing space to preserve support for the slowing economy.
(Bloomberg) — Malaysia is expected to leave its benchmark interest rate unchanged Thursday, as cooling inflation gives the central bank some breathing space to preserve support for the slowing economy.
Bank Negara Malaysia will hold the overnight policy rate at 3% for a second straight meeting, according to all 21 economists in a Bloomberg survey — the first such unanimous view in more than a year.
Standing pat would allow the central bank to continue assessing the impact of its cumulative 125 basis points of rate increases since May 2022. With inflation dipping to a near-two-year-low in July, a more immediate concern for the BNM is the looming risks to Malaysia’s growth outlook.
Increasing external uncertainty, persistent labor market slack and high base effects pose “more challenges to Malaysia to sustain its growth momentum in the coming quarters,” United Overseas Bank analysts Julia Goh and Loke Siew Ting wrote in a note. This limits room for the BNM to further tighten its monetary policy, they said, adding that the OPR will likely be kept at 3% for the rest of 2023.
The trade-reliant nation is already under strain from weakened global activity. Malaysia’s growth came below expectations in the April-June period, prompting the BNM to predict that the economy may expand at the lower end of the 4% to 5% range it has forecast for 2023. The central bank is counting on consumer demand to drive growth for the remainder of the year.
What Bloomberg Economics Says…
More tightening is unlikely this year for several reasons. First, headline inflation is back to 2% and the core gauge looks set to follow. The ringgit has also stabilized. Altogether, this will anchor inflation expectations. Second, growth should slow markedly in 2H23. The boost to domestic demand from targeted tax cuts will likely fade, while weaker global demand dents exports and saps business lending.
— Tamara Mast Henderson, Bloomberg Intelligence
Click here for the full note.
July’s consumer price index continued the downward trajectory seen since November, putting to rest the BNM’s previous fears of “financial imbalances”. The bank sees price pressures averaging in the lower bound of the 2.8% to 3.8% forecast range, with risks stemming mainly from global developments, according to Bank Negara Governor Abdul Rasheed Ghaffour last month.
To be sure, Malaysia is facing renewed threats to prices. The government is planning measures to ensure it has sufficient supplies of rice following India’s export curbs that rattled global markets and sent prices soaring. Still, rising rice prices would have a “negligible” effect on overall CPI growth, according to Nazmi Idrus and Mas Aida Che Mansor of CGS-CIMB. They maintained their inflation forecast at 2.8% for 2023.
Malaysia may update its official annual growth and inflation forecasts when Prime Minister Anwar Ibrahim, who holds the finance portfolio, unveils his 2024 spending plan next month.
In any case, the BNM hasn’t ruled out further adjustments to the interest rate, with the central bank maintaining that monetary policy decisions will remain data dependent. Policymakers could still raise borrowing costs by another 25 basis points this year given the funds-outflow pressure on the local currency, according to a research note by Apex Securities.
Expectations for a rally in the ringgit remain low, dragged down by growth concerns in China — Malaysia’s largest trading partner — and a wide interest-rate gap with the US. The ringgit finished the first half of the year near the bottom of Asia’s leaderboard.
–With assistance from Tomoko Sato.
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