Malaysia: BNM maintains its policy rate unchanged at 3.00% after July's surprising cut
September 7, 2016
On 7 September, Bank Negara Malaysia (BNM) held the fifth of its six monetary policy meetings this year. This was the third such meeting under the remit of newly-appointed governor Datuk Muhammad bin Ibrahim. After a surprising 25-basis-point cut in July, BNM maintained its Overnight Policy rate (OPR) unchanged at 3.00%—a decision widely expected by market analysts. The statutory reserve requirement (SRR) was also left unchanged at 3.50%.
Although BNM’s decision follows Q2’s weak GDP figures—resulting from weaker net exports and a drawdown in stocks—the Bank is waiting to see if the government includes additional stimulus measures in its upcoming budget in October. This fiscal stimulus could potentially boost private consumption and private investment which were the key drivers of growth in Q2. On the external front, Bank Negara expects growth to remain subdued given the lackluster demand from Malaysia’s key trading partners and, overall, monetary authorities estimate the economy to grow within expectations in 2016, and to continue on a steady growth path next year.
The Central Bank highlighted that domestic financial conditions had remained stable since July’s MPC meeting and that financial markets continued to operate in an organized manner. They also emphasized that, “at the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation, supported by continued healthy financial intermediation in the economy.” Regarding this statement, Euben Paracuelles and Brian Tan, Economists at Nomura said:
“In our view, this suggests BNM remains ready to adjust its policy rate should downside risks to its growth projection materialise. In our view, expecting “a steady growth path in 2017” implies scope for disappointment is relatively high. We believe fiscal policy will be tighter in H2, adding to headwinds which could result in faltering growth momentum going into 2017. This will likely become more visible by the November meeting and hence we maintain our forecast for BNM to cut the policy rate by another 25bp.”
Going forward, BNM cautioned that, “downside risks to global growth remain high on uncertainty over the growth momentum and policy shifts in major economies, and unresolved issues post EU-referendum in the UK.” Meanwhile, the Bank projects inflation to be at the lower end of the 2%-3%range for this year and expects it to stay relatively stable in 2017, given the environment of subdued global energy and commodity prices, and generally low global inflation.
Author: Luis Lopez Vivas, Economist