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Malaysia Monetary Policy July 2018

Malaysia: BNM stands pat during first meeting under new governorship

The Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) opted to leave the overnight policy rate (OPR) unchanged at 3.25% during its meeting on 11 July, where it has been since January; the decision was in line with market expectations. July’s meeting marked the first under the governorship of Nor Shamsiah Mohd Yunus, the former deputy governor who replaced Muhammad bin Ibrahim after he offered to resign early last month. The resignation was given following questions over the Bank’s role in a land purchase deal linked to 1Malaysia Development Berhad, which is being investigated for money laundering. The change in governance is unlikely to significantly affect the Bank’s monetary stance.

The decision to leave the OPR untouched was justified on the grounds of solid private sector activity and export growth underpinning robust economic activity in the first half of the year. A reduction in policy uncertainty should buttress economic activity in the months ahead, and the Bank further added that “the Malaysian economy is expected to remain on a steady growth path”. However, this could be interpreted as a slightly less optimistic tone than the May statement, in which the Committee noted that “the prospects for the Malaysian economy remain strong”.

Solid economic activity, driven by robust domestic and external demand, is expected to fan inflationary pressures. However, the Bank mentioned “recent policy measures on domestic cost factors” as a source of downward pressure on prices. This is likely linked to the recent zero-rating of the Goods and Services Tax and the re-introduction of fuel subsidies. In fact, the Bank noted that “headline inflation is likely to turn negative in some months and remain low in the first half of 2019”. As a result, the Bank projects headline inflation for this year to be lower than previously estimated. The Committee expects inflation to subsequently trend higher as the effects of the policy measures fade.

The communiqué’s tone points to a more dovish stance going forward. In addition to reducing its inflation forecasts for 2018, the Bank was also less upbeat about prospects for the regional economy. The Bank noted that the “balance of risks to the outlook has titled to the downside”, likely due to the escalation of trade tensions between the United States and China, as well as monetary policy tightening in advanced economies such as the United States and the European Union. As a result, the policy rate is expected to remain low for some time, with only a few panelists penciling in a rate hike by the end of 2018.

The next monetary policy meeting is scheduled for 5 September.

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