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Malaysia Monetary Policy May 2018

Malaysia: BNM holds fire as widely expected, but unexpected election result casts uncertainty over the economic outlook

At its 10 May meeting, the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) held fire and kept the Overnight Policy Rate (OPR) unchanged at 3.25%, as widely expected by market analysts. The Bank last hiked its rate in January on the grounds of elevated inflation, which has since normalized, warranting the decision taken by the Committee.

In its press release, the Bank stated that it expects the Malaysian economy to continue on its steady growth path amid somewhat muted inflationary pressures this year. In the eyes of the Bank, the economy should be buttressed by private sector activity as well as robust export growth. In the private sector, household consumption will likely benefit from sound labor market dynamics, while fixed investment should reap the benefits of infrastructure projects. Exports, meanwhile, are expected to benefit from the upbeat global economy despite increased geopolitical tensions; the Bank noted, however, that “there are risks should trade and geopolitical tensions worsen”.

The Bank expects inflationary pressures to remain moderate this year due as an appreciating ringgit mitigates import costs. However, oil price movements, “which remain highly uncertain”, will influence the inflation trajectory.

The statement was notably devoid of any mention of the 9 May election results, in which the opposition Pakatan Harapan (PH) party upset the incumbent Barisan Nasional party, which means the government will change for the first time since Malaysia gained independence in 1957. The change poses downside risks to the economic growth outlook for the country, with uncertainty surrounding future policy. Furthermore, the PH pledge to review government procurement and plans could slow public spending growth.

In terms of forward-looking guidance, the communiqué reiterated the Bank’s commitment to monitoring and assessing risks to economic growth and inflation. With the Bank noting that the current level of monetary policy accommodation corresponds with the objective of ensuring a steady growth path for the economy, the majority of FocusEconomics Consensus Forecasts panelists do not expect a rate hike this year. That said, some panelists expect a rate hike in the third or fourth quarter of this year. Most of the panel expects some monetary tightening by this time next year.

The next monetary policy meeting is scheduled for 11 July.

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