Bank Negara Malaysia Unexpectedly Holds Rate Steady At 2.75%

Malaysia’s central bank maintained its benchmark rate in a surprise move at this year’s first policy meeting on Thursday, as policymakers assessed that the current rate remains accommodative and supportive of economic growth amid the resilient domestic demand.

The Monetary Policy Committee of Bank Negara Malaysia decided to keep the Overnight Policy Rate unchanged at 2.75 percent. Meanwhile, economists had expected the bank to hike the rate by a quarter basis points to 3.00 percent.

After the fourth consecutive rate increase in the tightening cycle that began in May 2022, the key rate was left unchanged at the latest meeting.

“Today’s decision allows the MPC to assess the impact of the cumulative past OPR adjustments, given the lag effects of monetary policy on the economy,” the BNM said in a statement.

Policymakers assessed that the current stance of monetary policy remains accommodative and supportive of economic growth.

Further normalization to the degree of monetary policy accommodation would be informed by the evolving conditions and their implications for the domestic inflation and growth outlook, the bank said.

Recent data revealed that the Malaysian economy continued its expansion in the final quarter on the back of resilient domestic demand conditions.

As a result, growth in 2022 is estimated to have exceeded the earlier projections of 6.5 percent to 7.0 percent. Growth will moderate this year amidst a slowing global economy after a strong performance in 2022.

Domestic demand is expected to remain the key driver of economic growth, as household spending will be boosted by sustained improvements in employment and income prospects along with an on-going boom in tourism related sectors, which supports local business.

However, the central bank noted that downside risks to the domestic economy continue to stem from weaker-than-expected global growth, higher risk aversion in global financial markets amid more aggressive monetary policy tightening in major economies, further escalation of geopolitical tensions, and supply chain disruptions.

Read more: Malaysia Trade Surplus Shrinks As Export Growth Slows

As per the latest official data, consumer price inflation held steady at 4.0 percent in November.

Headline inflation peaked in the third quarter of 2022, while core inflation averaged 2.9 percent in the year up to November, the bank said.

In 2023, headline and core inflation are expected to moderate, but remain elevated due to lingering demand pressures and cost pressures.

Nonetheless, the upward pressure on inflation will have to face tough challenges from existing price controls and fuel subsidies, as well as the remaining spare capacity in the economy.

The balance of risk to the inflation outlook is tilted to the upside and remains highly subject to any changes to domestic policy on subsidies and price controls, as well as global commodity price developments, the bank said.

Capital Economics economist Shivaan Tandon said the latest move to leave interest rates unchanged represents an end, rather than just a pause to the tightening cycle as economic growth is set to slow and inflationary pressures are easing.

The firm expects the central bank to start cutting interest rates in 2024 and forecast GDP to grow by just 3.5 percent in this year, which is well below the consensus forecast of 4.3 percent, and 9.0 percent estimated growth in 2022

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