Bank Negara Malaysia keeps interest rate on hold, likely to maintain neutral tone through 2019

The Malaysian central bank, Bank Negara Malaysia, kept its Overnight Policy Rate on hold at 3.25 percent, as was widely anticipated. The central bank maintained that the global growth continues albeit with “signs of moderating momentum.” According to BNM, risks continue to be on the downside. In particular, they note that trade tensions, volatile financial markets, and policy normalization in some advanced economies could lead to pressures in financial markets.

BNM, on the domestic front, continues to anticipate an expansion in private sector activity, driven by private consumption. The central bank believes strong labor market conditions will underpin private consumption beyond the impact of the ‘tax holiday’. On the investment front, the central bank has removed the clear reference to growth in “export-oriented” industries, but anticipates sustained investment activity throughout key sectors. BNM acknowledged the contribution to growth from exports to decrease, given easing global growth momentum.

On the other hand, the central bank stated that the 2019 budget has given clarity on fiscal and economic uncertainty. In all, Malaysian GDP growth is likely to stay on a steady path this year and the next year, noted ANZ in a research report.

The headline inflation is likely to accelerate next year, rather than “edge forward” as in the previous statement. This is mainly because of increased prices in global oil and the floating of domestic fuel prices. The effect of the Sales and Services Tax is likely to wane through next year.

“We expect BNM to maintain its ‘neutral’ tone and remain on hold through 2019. The central bank remains accommodative, but is unlikely to cut rates given an expected increase in inflation and risks associated with capital outflows”, added ANZ.