Malaysia Central Bank is expected to keep monetary policy on steady keel today

Bank Negara is expected to keep monetary policy on steady keel today. The central is widely expected to leave the Overnight Policy unchanged at 3.25% in today's meeting. Despite the mix of higher inflation, slow growth and the pressure to defend the ringgit, Bank Negara has to maintain a stable monetary policy as room for any sort of monetary action is limited. 

Although inflation has been higher than usual given the slump in energy prices, existing inflationary pressure is mainly a result of the GST. It is policy driven and the impact is transient in nature, henceforth does not warrant a policy tightening. In addition, pressure to defend the ringgit has also dissipated with Fed's rhetoric turning slightly more dovish. But most importantly, given Bank Negara's previous track record of pre-emptive approach in its monetary policy, it would have done so as early as last year when the ringgit started back-pedalling. 

Separately, growth momentum is slowing amid the deceleration in China and the dicey global outlook. Though the temptation is to ease monetary policy to support growth, recent signs of stabilisation in China and the above domestic constraints will prompt a stable policy stance. That is, between saving the currency and/or addressing transient inflationary pressure versus preventing a fall-out in growth, the central bank will likely continue to stay neutral.