5-9-2023 (KUALA LUMPUR) Bank Negara Malaysia (BNM) is set to maintain its key policy rate at 3.00 per cent, aligning with the prevailing stance adopted by the majority of its Asian counterparts. This decision comes amidst indications of moderating economic growth and a cooling inflation trend, according to a recent Reuters poll of economists.
Inflation in the Southeast Asian nation hit a two-year low of 2.0 per cent in July. The central bank, although not primarily focused on targeting inflation in its monetary policy, has expressed its intent to further curb it.
This implies that BNM, having undertaken a relatively modest increase of 125 basis points in the current cycle, has likely concluded its tightening measures. However, it plans to maintain higher interest rates for an extended period due to concerns that the weak ringgit, which has depreciated by over 5 per cent this year, could hinder a rapid decline in inflation.
All 27 economists surveyed between August 29 and September 4 in the Reuters poll unanimously anticipated that the central bank would retain its benchmark overnight policy rate at 3.00 per cent during its upcoming meeting on September 7. Median forecasts also suggest that this rate will persist through 2024.
Lavanya Venkateswaran, senior ASEAN economist at OCBC Bank, commented, “BNM has limited reasons to change its policy stance for its upcoming meeting, inflationary pressures are easing, keeping the hawkish bias in check. BNM’s focus will remain on financial stability and external risks.” She added, “BNM’s ‘slightly accommodative’ policy stance remains supportive of slowing growth hence there is no imminent need to ease policy. Moreover, BNM’s rate hiking cycle was less aggressive than regional peers implying that the room to pare back rate hikes is lower.”
A significant majority, 24 out of 25 economists, expected the central bank to maintain rates at 3.00 per cent until the end of this year. Only one economist anticipated a 25 basis point hike to 3.25 per cent in November.
Some economists issued a word of caution, suggesting that inflation could potentially rise again once pandemic-era subsidies were phased out, indicating that the battle against price increases might not be entirely won.
However, the backdrop of slowing domestic economic growth, coupled with a lackluster global economy and a weaker China, which is Malaysia’s largest trade partner, would likely compel the central bank to keep rates on hold for an extended period.
Among the economists who offered predictions for rates until the end of 2024, over 80 per cent of them, specifically 15 out of 18, anticipated that the central bank would maintain rates. Of the remaining three, one predicted that rates would peak at 3.25 per cent, while two expected a reduction to 2.75 per cent.
This prognosis remains in contrast to regional peers who have completed their monetary policy tightening cycles and are expected to initiate easing measures in the first half of the next year.
Kit Wei Zheng, director and head of ASEAN Economics at Citigroup, explained, “Leading indicators still point towards subdued third-quarter growth, the MPC will likely keep policy slightly accommodative with the rate maintained at 3 per cent. Our base case remains for an extended pause through 2024.” He further noted, “The MPC may choose to wait until there is greater clarity over the timing and magnitude of subsidy reform before deciding whether or not to hike.”
