Bank Negara Malaysia keeps interest rate unchanged, citing strong household demand

The Bank Negara Malaysia (BNM) in its first monetary policy meeting of 2017 on Thursday maintained its overnight policy rate (OPR) at 3.00 percent, as it was widely expected. This decision was supported by stronger household demand, higher inflation prospects and weak MYR.

According to the monetary policy statement, the Bank Negara Malaysia noted that the private sector activity will be the key driver of economic growth and committed to continuously inject liquidity to ensure stable FX market.

“We expect inflation to edge higher to 2.7% in 2017 from 2.1% in 2016 on cost-push price pressures arising from firmer global oil prices and the government’s subsidy rationalisation scheme for cooking oil, and as the impact of MYR weakness starts to flow through,” said ANZ in its research note.

The ANZ in its research note mentioned that the measures that Bank Negara Malaysia implemented have provided some support to the Malaysia Ringgit (MYR) and enhance onshore foreign exchange liquidity. These pre-emptive measures will help stabilise the ringgit and support financial stability by restricting potential avenues for Malaysia Ringgit speculation, thereby ensuring a steady demand for the currency. Details can be found in the Supplementary Notice on Foreign Exchange Administration Rules

Nonetheless, Malaysia is still vulnerable to a stronger U.S. dollar and rising US Treasury yields. High foreign ownership of Malaysian Government Securities means there is a risk of further outflows, and the structural decline in the current account surplus has resulted in the ringgit being more susceptible to capital flows. These dynamics will exert depreciation pressure on the Malaysia Ringgit and constrain Bank Negara Malaysia’s monetary policy space, they added

Meanwhile, USD/MYR fell 0.34 percent post this release.