Bank Negara likely to stay pat for rest of 2016; private consumption to remain in focus

The central bank of Malaysia is expected to remain on hold for the rest of 2016, mainly focusing on private consumption. With Bank Negara Malaysia (BNM) indicating it is still positive on domestic demand in its monetary policy statement, the overhang risk of another policy rate cut could be triggered by a significant slowdown in domestic demand, particularly private consumption, ANZ reported.

In regards to the economic stance of Malaysia, bank credit has eased notably, with moderate growth in consumer credit. Also, business loans have contracted significantly since March, 2016. Sales of both commercial and passenger vehicles also slumped since the turn of the year, mirroring the decline in loans for purchases of transport vehicles.

However, recent attempts to raise the minimum wage, in order to boost private consumption, only had a limited effect on the latter. Malaysia has increased the minimum wage to MYR1,000 (MYR1,200 for civil servants) from MYR900 effective from 1 July 2016. However, only 1.6 percent of households fall under the income category of MYR1,000 which the minimum wage hike seeks to benefit. By contrast, almost half of total households in Malaysia earn at least MYR5,000.

Moreover, real wage growth is expected to be supportive of future consumption, especially with the recent hike in minimum wages. Wages in the manufacturing sector rose 6.7 percent between January and May at a faster pace than the 5.9 percent registered in the preceding year.

"While we expect BNM to remain on hold for the rest of this year at 3.00 percent, the baseline policy call does not detract from vulnerabilities on the growth front," ANZ said in its recent research note.

Meanwhile, while the surprise rate cut by BNM in July posed a possible shift in regime in the policy reaction function, it is expected to not to be surprised by the possibility of a more aggressive easing path should growth and inflation undershoot expectations.