Malaysia Leaves Key Rate on Hold

Malaysia’s central bank left the overnight policy rate on hold at 3.25 percent on March 5th, saying inflation is expected to increase only after the first quarter of 2015 while domestic demand will remain a key driver of growth.

Statement by the Bank Negara Malaysia:

While the global economy continues to expand at a moderate pace, there has been increasing divergence in the growth momentum among the major economies. For most of Asia, growth is supported by the continued expansion of domestic demand. Looking ahead, the global economy is expected to continue on a moderate recovery path. Nevertheless, the downside risks to the global economic outlook remain given the weak growth momentum in a number of major economies. The uncertainties in the policy environment are also contributing to the shift in sentiments in the international financial markets.

While the Malaysian financial markets have been affected by these global developments, there remains ample liquidity in the domestic financial system with continued orderly functioning of the financial markets. The banking institutions are also operating with strong capital and liquidity buffers, and continue to provide financing to the economy. There has, therefore, been no disruption to financial intermediation.

In the Malaysian economy, domestic demand has continued to support growth amid a moderation in exports in the fourth quarter of 2014. Going forward, domestic demand will remain as a key driver of growth. While the introduction of the Goods and Services Tax and the lower earnings in the commodity sector are expected to have some impact on private consumption, household spending will continue to be supported by the steady increase in income and employment. Additionally, the lower fuel prices are contributing to higher disposable income. Investment activity is also expected to remain resilient, with broad-based capital spending by both the private and public sectors, thus cushioning the lower investment in the oil and gas sector. While export growth will be affected by the lower commodity prices, the performance of manufactured exports is expected to improve. The prospects are therefore for the Malaysian economy to still remain on a steady growth path.

Headline inflation declined in January and is expected to remain low in the first quarter of 2015. For the rest of the year, headline inflation is expected to trend higher, but to be below its historical average. The lower fuel prices will partially offset other domestic cost factors. While the monthly headline inflation would be subjected to the volatility in global oil prices, underlying inflation is expected to remain contained amid the stable domestic demand conditions.

At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity. The MPC will continue to carefully assess external and domestic developments and their implications on the risks to inflation and on the Malaysian economy. The MPC will also continue to monitor the risks of destabilising financial imbalances to ensure the sustainability of the overall growth prospects.

Malaysia Leaves Key Rate on Hold

Bank Negara Malaysia | Joana Taborda |
3/5/2015 10:29:38 AM