Bank Negara Malaysia (BNM) stood pat at policy meeting on Thursday, holding the Overnight Policy Rate (OPR) unchanged at 3.00 percent. BNM said that economic conditions have evolved in line with their expectations.

In the monetary policy statement that followed, BNM noted that private sector activity along with more positive contribution from the external sector will keep growth underpinned. It added that inflation will likely remain relatively elevated in the first half of the year and moderate thereafter.

Malaysia's government has removed fuel subsidies and therefore, the correlation between domestic and international fuel prices has become tighter. Malaysia’s headline CPI spiked in January owing to higher domestic fuel prices. Looking ahead, ANZ research expects inflation to continue to edge higher in February to 4 percent y/y from 3.2 percent as oil prices have continued to increase.

Currency stability will be a key focus for the central bank in the near term. Downside risks to growth due to global uncertainties remain, but a recent upturn in some indicators including exports will allow the central bank to breathe more easily. Hence the inflation spike by itself is unlikely to elicit a policy response from BNM.

"Still, we do not expect BNM to react to these spikes in headline CPI and rather focus on core inflation, which has only edged up marginally to 2.3% y/y from 2.1% in the preceding month," said ANZ in a report.