Malaysian economy continues to record solid growth

The Malaysian economy continues to record solid growth, though the pace decelerated notably in the second quarter to 4.9% y/y from the 5.6% gain recorded in the first three months of 2015. Activity is driven by domestic demand: despite the GST implementation in April, private consumption is underpinned by rising incomes and sound labour market conditions. Investment activity is supported by private sector outlays in manufacturing and services sectors as well as public infrastructure-related expenditures. This should partially compensate for the investment downturn in the oil and gas sector as well as weaker export sector performance. 

Real GDP growth will likely average 5% y/y in 2015-16. Inflationary pressures are on the rise due to the introduction of the GST together with adjustments to domestic fuel prices. The consumer price index rose by 3.3% y/y in July compared with an average gain of 0.7% y/y in the first quarter of 2015; inflation will likely close the year slightly below 3% y/y. 

"Underlying price pressures remain contained; therefore, we expect the Malaysian central bank to keep the benchmark interest rate at 3.25% over the coming months", notes Scotiabank.

The key rate has remained unchanged since July 2014 when it was raised by 25 basis points. Despite Malaysia's strong external position (current account surplus will be of around 3% of GDP this year), the ringgit has been the worst performer among major Asian emerging market currencies year-to-date and the country's international reserves have fallen by 29% since a year ago