Malaysia: Central Bank maintains rates in May, signals potential adjustment on horizon
May 8, 2014
At its 8 May monetary policy meeting, the Central Bank left the Overnight Policy Rate (OPR) unchanged at 3.00%, a decision that was consistent with market expectations. The Bank has kept its policy rate at the current level since May 2011.
Bank Negara Malaysia stated that global economic growth was moderate during the first quarter of the year due to events in major economies, but that it expects the global economy to stay on a recovery path going forward. Growth in Asia is being driven by improvements in the external sector as well as strengthening domestic demand. The Bank added that, “conditions in global financial markets have also improved.” Domestically, recent data reflect “favorable performance in the first quarter”. Exports and investment will be the drivers of economic growth going forward. Moreover, “private consumption will be underpinned by stable income growth and favorable labor market conditions.” The Bank expects overall economic growth momentum to be sustained in the months ahead.
Regarding price developments, the Central Bank recognized that inflation has stabilized amid improved weather conditions and a moderation in the impact of the fuel price adjustments associated with fiscal reordering. Inflation was steady at February's 3.5% in March. Nonetheless, the Bank added that, going forward, inflation will, “remain above its long-run average due to the higher domestic cost factors.”
With strong growth prospects and inflation running above its long-term average, the Bank explained that there are signs of a, “broader build up in economic and financial imbalances.” Consequently, the Bank stated that the current accommodative monetary policy might need to be adjusted in future meetings in order to minimize risks and keep the economy on track.
For 2014, panelists expect the monetary policy rate to end the year at 3.26%. For 2015, the panel expects the policy rate to end the year at 3.41%.
Author: Carl Kelly, Economist