Bank Muamalat's Mohd Afzanizam said Bank Negara’s decision would be primarily driven by domestic factors.
PETALING JAYA: While the US Federal Reserve (Fed) is expected to lower its fund rates at the next Federal Market Open Committee meeting this month, observers are assuming that central banks globally will likely follow suit.
It is interesting to see if Bank Negara Malaysia will also cave in to the “peer pressure”, should the anticipated worldwide rate cuts come to pass, although observation from the past few years should put paid to that theory.
As several economists have pointed out, the country’s monetary authority is independent in its decision-making process.
Senior economist at UOB Global Economics and Markets Research Julia Goh said Bank Negara would likely maintain its Overnight Policy Rate (OPR) of 3% at the next seating.
“We do not expect Bank Negara to adjust rates downwards despite expectations of more central banks joining the easing cycle.
“The reason is that Malaysia’s robust outlook and domestic drivers of growth, particularly private consumption as well as investments, provide strong underlying support for the economy,” she told StarBiz.
Moreover, exports recovery is also expected to gain momentum towards the later part of the year.
On the flipside, Goh cautioned that there are upward inflation risks on the horizon in view of further subsidy rationalisation measures.
Given the balance of risks, she is expecting the OPR to stay on hold for the rest of the year as well as in 2025, providing further support for the ringgit which is projected to move towards its fair value at RM4.20 against the dollar by the middle of next year.
A Reuters poll conducted between Aug 27 and Sept 2 of 30 economists concurred, predicting that the central bank would leave its overnight policy rate unchanged at 3%.A median from a smaller sample showed Bank Negara rates should remain at the current level until at least 2026, a view unchanged since the beginning of the year.
“There is no reason for it to change the policy rate right now, as growth is at the higher end of expectations and inflation has been surprisingly benign,” Lavanya Venkateswaran, senior Asean economist at OCBC Bank, told Reuters.
According to senior Asia economist at UK-based Pantheon Macroeconomics Moorthy Krishnan, there is still uncertainty about the timing of further fuel subsidy rationalisation and Bank Negara is probably monitoring the effects from the diesel fuel subsidy removal.
“As such, a cut would appear premature,” he said.
According to leading economist Prof Geoffrey Williams, an interest rate cut from Bank Negara at present may sound attractive, but is not necessary at the moment.
He opined that it is better to have stable monetary policy in the current environment, especially since inflation is in the normal range and the economy is growing, thus indicating that the regulator has met two of its three targets of price stability and sustainable economic growth.
“The financial sector is sound, which secures the third target. The ringgit has strengthened and overall the macroeconomic environment is in good shape. So there is no need to change rates,” he said.
Additionally, Williams said with the Employee Provident Fund Akaun Fleksibel withdrawals amounting to less than expected, coupled with recent surveys suggesting most of the withdrawals are being used to pay off debts, the effect should not be inflationary.
However, he noted two slight risks which may arise, firstly from economic growth above potential which can cause inflation in the future; and secondly, the appreciation of the ringgit which can add to import price costs.
“But both are minor issues which should not affect interest rates,” he said, hinting that lowering rates would push more demand, which is already growing above potential, leading to unnecessary inflation.
An early reduction of the OPR would also widen the interest differential with other countries, which would weaken the ringgit.
This is something that is not necessary or desirable when the expected narrowing of the interest differential is helping to strengthen the local note, according to Williams.
Bank Muamalat (M) Bhd chief economist Mohd Afzanizam Abdul Rashid said Bank Negara’s decision would be primarily driven by domestic factors.
“The domestic factor we are referring to is the inflation dynamics as we have yet to see the announcement of RON95 subsidy rationalisation. The uncertainties are the timing of the implementation and quantum of adjustment,” he said.
