Malaysia Monetary Policy March 2016


Malaysia: Central Bank maintains policy rate at 3.25%, markets on the lookout for Governor Zeti's successor

March 21, 2016

Bank Negara Malaysia (BNM) held its second policy meeting of the year on 9 March. This meeting was somewhat unusual as instead of attention being focused policy rate decisions, markets were paying closer to attention to any details regarding the successor of Central Bank Governor Zeti Akhtar Aziz, whose 16 year run at the helm of BNM is scheduled to end at the end of April, making this her last policy rate decision as head of BNM. The Prime Minister’s office is in charge of selecting a replacement, and since the BNM has been leading investigations into the 1 Malaysia Development Berhad (1MDB), scandal, in which Prime Minister Najib Razak is implicated, concerns over the Central Bank’s independence have arisen.

The policy rate decision yielded little surprise, as the Bank acted in accordance with market expectations and left the Overnight Policy Rate (OPR) at 3.25% The Bank has maintained its OPR at 3.25% since 10 July 2014, however, at its January meeting it demonstrated an easing bias by lowering the statutory reserve requirement ratio by 50 basis points to 3.50%. This bias did not extend to the latest meeting, however, as stronger-than-expected growth in Q4 2015 and spiking inflation in Q1 2016 have discouraged the Bank from cutting rates or reserve requirement ratios.

Overshadowing the policy rate decision, are developments surrounding Governor Zeti’s potential replacement. Reports have claimed that Treasury Secretary-General, and 1MDB advisory board member, Tan Sri Dr Mohd Irwan Serigar Abdullah has been tapped by Prime Minister Najib Razak to replace Zeti. This potential appointment has caused a stir and called the Central Bank’s credibility into question. After it surfaced in early 2015 that 1MDB, a large state-owned investment fund, whose failure could have deep seat financial market repercussions, had mismanaged its funds and was starting to miss payments to bond holders and banks, investors began to panic. The story became more convoluted when a Wall Street Journal article published in July 2015 claimed that it had discovered a paper trail connecting USD 700 million in missing funds from 1MDB and the personal accounts of Prime Minister Najib Razak. The resulting financial fallout pushed the ringgit to its weakest level in years as fears arose over the health and transparency of the Malaysian financial system.

The BNM, aside from conducting monetary policy, also has a role as an investigative authority and initiated its own independent investigation into the 1MDB affair. The Bank recommended criminal persecution against 1MDB in October, but proceedings were denied by the attorney general. Since then, the Bank’s investigation has been stonewalled by inaccurate and incomplete information disclosure, resulting in BNM revoking 1MBD’s permission to invest abroad. The Bank’s investigations have since been discontinued.

Zeti has garnered a number international accolades recognizing her strong leadership at the head of the Bank, however her recommendations of an internal successor have fallen on deaf ears. Instead, Prime Minister Najib made it clear in statements released in mid-March that the government has the final say over who holds the position. Markets will be watching closely to see who is eventually picked. Should Dr. Mohd Irwan Serigar bin Abdullah, or another ally of Najib be selected, this could tarnish the Central Bank’s independence and credibility in the eyes of investors and affect inflation expectations and financial stability. It will also raise questions over Najib’s own level of culpability in the 1MDB scandal.

Despite the potential conflict of interest concerning the Central Bank appointment, Malaysia’s economy is diversified, and undergoing a period relative stability. Vincent Loo Yeong Hong, Manager at RHB Research felt that the current period of stability should continue unabated by complications over Zeti’s replacement, and added:

“While investor confidence may be jittery over the uncertainty of Central Bank Governor’s succession, we do not think it would spark a major selldown if the WSJ report turns out to be true. Last year when the rumours emerge over the possible replacement of the Governor, it was during the period of a sharp retracement in the MYR and the ultimate concern was whether Dr Zeti would be replaced immediately and if the successor was going to implement capital controls. Given that the Government had on multiple occasions ruled out this possibility, we think this has addressed those concerns and now that the ringgit has stabilised, there would not be a strong reason for investors to panic. On the issue of governance and conflict of interest (if WSJ is true), this has not stopped the inflow of capital into the country recently, even as the deadline for Zeti to step down looms nearer.”

The panel of economic analysts we surveyed for this month’s Consensus Forecast expect the monetary policy rate to end this year at 3.28%. Our panel expects the policy rate to climb to 3.32% by the end of 2017.

Author:, Economist

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Malaysia Monetary Policy Chart

Malaysia Monetary Policy January 2015 1

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

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