Malaysia Monetary Policy May 2016


Central Bank maintains policy rate at 3.25% at Governor Ibrahim's first policy meeting

On 19 May, Bank Negara Malaysia (BNM) held it’s third of six policy meetings this year. As predicted by market analysts, BNM decided to hold the Overnight Policy rate (OPR) at 3.25%, where it has been since 10 July 2014. However, this meeting took on added saliency as it was the first meeting with recently appointed Governor Datuk Muhammad bin Ibrahim at the helm. Ibrahim began his five year tenure as the central bank governor on 1 May, replacing Zeti Akhtar Aziz who had been the governor for over 15 years.

Ibrahim was formally appointed by Prime Minister Najib Razak on 27 April. Prior to taking on the role of governor Ibrahim was a deputy governor at the BNM. There had been concerns prior to the announcement that the Prime Minister would appoint a candidate with whom he was more politically aligned. The BNM and the Prime Minister–who was on the board of advisors at the scandal-ridden 1MDB investment fund–had been at odds since the BNM undertook an investigation into wrongdoing at the fund. Ex-governor Zeti had been critical of the 1MDB and urged criminal proceedings against the fund and revoked the fund’s permission to invest abroad. News of Ibrahim’s appointment appeared to ameliorate concerns that Najib would appoint a political ally from outside the Bank that would shield the 1MDB board of directors from Central Bank investigations. Such a move would have compromised the credibility of the Central Bank. Instead, Ibrahim’s appointment appeared to trigger an improvement in markets’ sentiment and sent the MYR on a modest rally after news of the appointment was released.

In terms of monetary policy, Ibrahim has made it clear that stability over the BNM transition is his priority. This made analysts confident that his first meeting would not involve any drastic changes to the Bank’s policy stance, such as a change to the OPR. The BNM’s monetary policy statement was largely unchanged from March’s statement. It elaborated that global growth remains moderated and volatility in international financial markets has subsided. At home, Malaysia is facing decelerating growth, as evidenced by Q1’s growth. Domestic demand is still the key driver of the economy and it is likely to strengthen further on the back of improved private consumption. Investment activity has been weak in recent months, as capex activity in the oil and gas sector has waned. However, the Bank stated that “overall investment activity will remain supported by the implementation of infrastructure projects and capital spending in the manufacturing and services sectors”.

Although the Bank felt it appropriate to keep the policy rate at its current level, there may be further easing in store. Growth is stable however downside risks are present. Key risks include political instability stemming from corruption allegations directed at the Prime Minister, as well as external risks associated with global demand, energy prices, and currency markets. BNM stated that they will keep a close eye on inflation, which will likely peak in the first half of 2016. The Bank will be monitoring such risks and could easy its policy stance accordingly. This may mean a cut to the OPR or further decreases in the reserve requirement ratio, which the Bank last decreased in January.

The panel of economic analysts we surveyed for this month’s Consensus Forecast expect the monetary policy rate to end this year at 3.23%. Our panel expects the policy rate to climb to 3.35% by the end of 2017.

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Malaysia Monetary Policy Chart

Malaysia Monetary Policy May 2016

Note: Overnight Policy Rate in %.
Source: Bank Negara Malaysia (BNM).

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