Statement by the Bank Negara Malaysia:
The global economy continues to expand at a moderate pace. While growth across the advanced economies has improved, it has remained modest. In most of Asia, domestic demand continues to support growth despite weaker exports. Looking ahead, the recovery in global growth performance has, however, become vulnerable to increased downside risks. International financial markets have also become more volatile following increased concerns over developments in Europe and continued policy uncertainties in several major advanced countries. There are also downside risks to growth in the major Asian economies.
For Malaysia, the latest indicators point to continued expansion of the economy in the second quarter, albeit at a more moderate pace. Overall growth continues to be underpinned by domestic demand. Growth in private consumption is expected to be slower following the frontloading of consumption activity prior to the implementation of the Goods and Services Tax (GST) in the first quarter. While households are expected to continue adjusting to the GST in the immediate future, overall spending will be supported by continued wage growth and stable labour market conditions. Investment activity is projected to be driven by capital spending in the manufacturing and services sectors, as well as for infrastructure projects. These developments will contribute towards offsetting the weaker performance of the external sector. On balance, the prospects are for the Malaysian economy to remain on a steady growth path, with domestic demand being the key driver of growth.
Headline inflation averaged at 2% in April and May. Going forward, headline inflation is expected to be higher following the impact of the GST and the recent adjustments to domestic fuel prices, before moderating towards the second half of 2016. Nevertheless, underlying inflation is expected to remain contained amid stable domestic demand conditions.
While recent global and domestic developments have affected the ringgit exchange rate and domestic financial markets, there remains ample liquidity in the domestic financial system with continued orderly functioning of the financial and foreign exchange markets. The financial institutions are also operating with strong capital and liquidity buffers. Access to financing has continued with credit growth remaining at healthy levels. Financial intermediation has therefore continued to support the economy.
At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity. The MPC recognises that there are heightened risks to global growth and financial conditions. These risks are being carefully monitored to assess their implications on macroeconomic stability and the prospects of the Malaysian economy. This is to ensure that the monetary policy stance is consistent with the sustainability of the overall growth prospects.