Malaysia: BNM raises policy rate in January
January 25, 2018
At its 25 January meeting, the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.25%—a move that was widely expected by market analysts. The decision came after the MPC signaled in its November meeting that it may adjust its policy stance going forward amid strong economic conditions at home and abroad. The Bank had kept the policy rate on hold at 3.00% since July 2016.
In its communiqué, the Bank noted that the rate hike was aimed at preventing financial risks arising due to prolonged monetary accommodation. The policy move was also motivated by the country’s ongoing strong economic performance as private consumption has strengthened on the back of rising wages and employment, and the external sector has benefited handsomely from strong global demand and higher commodity prices.
Conditions in the financial system have also remained robust: The banking sector has displayed adequate levels of capital and liquidity, and private sector lending has grown at a healthy pace. Regarding price pressures, inflation has stabilized in recent months, but remains near the top of the Bank’s comfort range of 3.0%–4.0% for last year. Inflation in December came in at 3.5% and averaged 3.7% in 2017.
Looking ahead, the Central Bank expects inflation to moderate as effects from global cost factors ease and a stronger ringgit helps mitigate import prices. However, it cautioned that the future path of inflation will be dependent on global oil prices, which it stated, “remain highly uncertain”. Moreover, the BNM expects the economy to continue on its solid growth trajectory, propelled by robust domestic demand and supported by positive spillovers from the external sector.
Despite the rate hike, the Bank acknowledged its policy stance remains accommodative and, hence, leaves the door open for further adjustment as it continues to assess the risks surrounding growth and inflation dynamics. In particular, stronger-than-expected growth in the domestic sector could fan core inflationary pressures, forcing the Bank’s hand. Nonetheless, a stronger ringgit and a tighter monetary stance should weigh on consumer prices going forward.
Author: Javier Colato, Economist