Bank Negara said global growth, while still expanding, remains weighed down by persistently elevated core inflation and higher interest rates. — Bloomberg
KUALA LUMPUR: With inflation expected to have peaked and global growth becoming weaker, Bank Negara decided to keep interest rates unchanged when its Monetary Policy Committee (MPC) kept the overnight policy rate (OPR) at 3%.
This also indicates the focus of the central bank has now changed to stimulating growth as opposed to keeping inflation at bay, said economists.
The monetary policy statement released by the central bank with the OPR decision also noted global growth continues to be soft and subject to downside risks.
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Thus a monetary policy that is able to support future growth has also become a priority for now which is why the central bank have kept interest rates at 3%.
However, concerns in the United States continue to be focused on any future hikes to interest rates by the Federal Reserve this year and the US stock market appears to indicate that apprehension now.
Socio Economic Research Centre executive director and economist Lee Heng Guie points out that headline inflation in Malaysia is moderating amid slowing domestic economic growth.
“The growth outlook in the second half of 2023 and 2024 is subject to downside risks from the prolonged declines in exports. Bank Negara seems to remain vigilant about headline and core inflation given the risk of supply concerns and the stance of domestic subsidy rationalisation,” Lee told StarBiz.
“We expect the OPR to remain unchanged at 3% and will remain at this level in the first half of 2024, depending on the economic and inflation outlook,” he added.
In its monetary policy statement, Bank Negara said global growth, while still expanding, remains weighed down by persistently elevated core inflation and higher interest rates.
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It said global trade is also affected by rotation of spending from goods to services, and the ongoing electrical and electronics (E&E) downcycle.
“The slower-than-expected growth in China also weighed on the global economy. Globally, headline inflation continued to moderate. While core inflation in advanced economies is slowing down, it remains above historical averages. For most central banks, the monetary policy stance is likely to remain tight,” it said.
Bank Negara also noted that the outlook for growth is subject to slower momentum in major economies, higher-than-anticipated inflation out turns, an escalation of geopolitical tensions and a sharp tightening in financial market conditions.
It said domestic financial conditions also remain conducive to financial intermediation amid sustained credit growth.
“These factors will continue to underpin the growth momentum going into 2024,” Bank Negara said.
There could also be upsides to the economy should there be a stronger-than-expected tourism activity rebound, a stronger recovery from the electrical and E&E downcycle and the faster implementation of existing and new projects, it said.
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Commenting on inflation, Bank Negara said risks on this front remain highly subjected to changes to domestic policy on subsidies and price controls, global commodity prices and financial market developments, and the degree of persistence in core inflation.“At the current OPR level, the monetary policy stance remains supportive of the economy and is consistent with the current assessment of the inflation and growth prospects,” it said.
“The MPC remains vigilant to ongoing developments to inform the assessment on the outlook of domestic inflation and growth. The MPC will ensure that the monetary policy stance remains conducive to sustainable economic growth amid price stability,” it added.
AmBank Economic Research said yesterday it expects the OPR to remain unchanged for the rest of the year at 3%.
“This is supported by the need to sustain domestic demand in the wake of ongoing external uncertainties and ebbing inflationary pressures in Malaysia as the headline inflation fell to 2% in July 2023,” AmBank Economic Research said.
“Any developments related to subsidy rationalisation and the implementation of a progressive wage model, with potential long-term price impacts, could lead to a reevaluation of the OPR forecast for 2024,” it noted.
The next MPC meeting is set for Nov 2 and it will be held after the reading of Budget 2024 on Oct 13.
AmBank Economic Research also noted of two key highlights from the latest monetary policy statement which is its view on China and its change in guidance of the monetary policy stance.
“The MPC’s view is that China’s economic recovery has been: slower-than-expected. While the sentence ‘... slightly accommodative’ has been removed from the latest statement, and monetary policy stance seems ‘... supportive’ of the economy based on current evaluation,” it said.
MIDF Research, meanwhile, said the OPR is expected to remain unchanged until the end of the year given the weakness in external demand.
“The current focus of Bank Negara’s monetary policy setting is to ensure a sustainable growth momentum of Malaysia’s economy. Even though core inflation is still sticky, weakening external trade performances is seen as a dragging factor on overall GDP growth,” MIDF Research said.
The research firm noted that the OPR-Fed Fund Rate differential is at the largest ever recorded at 2.25% in favour of the higher US rate.
MIDF said the ringgit is in good position as the domestic economy has momentum and, as net exporter of liquefied natural gas and palm oil, Malaysia stands to benefit from the elevated global commodity prices.
