As widely expected, the Malaysian central bank, BNM, kept its overnight policy rate on hold at 3 percent during its meeting today, with economic conditions evolving consistent with their projections. There has been an improvement in the outlook of private domestic demand and economic growth, with Budget 2017 supportive of stronger consumption, assisting in countering the possible slowdown in public investment because of the recent reduction in development expenditure, noted ANZ in a research report.

Bank Negara Malaysia, in its monetary policy statement, highlighted its commitment to carry on with providing liquidity to guarantee an orderly FX market. Malaysia’s inflation is seen at the lower end of the range of 2 to 2.5 percent.

Malaysia’s current account is expected to stay in surplus. In spite of the sluggish external demand, the Malaysian ringgit’s depreciation has countered the weakness in services and manufacturing exports. Moreover, with the stronger oil prices recently, the nation’s LNG export prices are likely to continue to rebound off the lows recorded in May 2016. The Malaysian government is anticipated to be sensitive to the current account developments, and prioritise lumpy capex imports to assist in easing any pressure on the external balance, according to ANZ.

Given that the Malaysian ringgit is an underperformer in the region and is falling below its post-Asian Financial Crisis fixed level of 3.80 against the U.S. dollar, there have been suggestions that a peg structure might re-emerge, stated ANZ.

The persistent weakness in the MYR is possibly the best barometer of investor sentiment towards Malaysia at present. There is risk that the confidence deficiency faced by the MYR might overshadow Malaysia’s still relatively strong fundamentals.

“We are wary that the tighter liquidity conditions in Malaysia’s banking system, as evident in the elevated loan-to-deposit ratio, could constrain economic growth”, added ANZ.