Bank Negara Malaysia likely to maintain a moderately dovish stance

Bank Negara Malaysia (BNM) kept the policy rate unchanged at 3.25 percent, in line with the consensus. However, to ensure sufficient liquidity in the financial system the central bank reduced the statutory reserve requirement (SRR) by 50bps to 3.5 percent effective from 1 February. Previously the central bank had changed the SRR in 2011, raising the rate from 1percent to 4 percent gradually. SRR was reduced due to capital outflows combined with increasing short-term rates and weak deposit growth.

Subdued private consumption puts downward pressure on the domestic growth; however, it is seen that domestic growth will remain supported by low unemployment, wage growth and infrastructure projects. BNM expects inflation to peak in Q1 16 with prices increasing in 2016 relative to 2015.

"Even with the SRR cut, the bank's guidance for its monetary stance is largely unchanged. We believe BNM continues to maintain a moderately dovish stance, with focus on downside growth risks coming from the weak external growth environment" - Barclays.