Bank Negara Malaysia stands pat, likely to hike rate by 25 bps in September

The Malaysian central bank stood pat during its policy decision meeting today. Bank Negara Malaysia kept its overnight policy rate at 3.25 percent after a 25 basis point hike in January. The policy statement did not provide any new substantive information on the state of the economy. It repeated that the global economy continues to be supportive of Malaysia’s exports. Solid exports also continue to have favorable feedback on income growth and domestic demand at large. Investment activity has been further underpinned by new and on-going spending in infrastructure, manufacturing, and services sectors.

On the inflation front, the statement again highlighted that headline inflation in 2018 will average lower than the 2017 level of 3.7 percent. The strength of Malaysian ringgit continues to aid in suppressing import prices.

“We also forecast headline inflation to be lower in 2018 but with the qualification that a substantial part of the easing is due to favorable base effects”, stated ANZ in a research report.

The only change in today’s statement from the previous was that the reference to the need for a policy stance that prevents the build-up of risks in the financial system was dropped. Rather, the statement highlighted that the current policy stance is in line with stable growth and lower inflation.

Growth outlook is likely to be positive. But as inflation has benefited from a favorable base effect, the current phase of moderation is expected to be temporary. This implies that the case for a second rate hike is a solid one.

“Accordingly, we expect BNM to raise the OPR by 25bps in September, taking the year end policy rate to 3.50 percent”, added ANZ.

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