BNM keeps key interest rate at 3.25%

This article first appeared in The Edge Financial Daily, on March 6, 2019.
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KUALA LUMPUR: As widely expected, Bank Negara Malaysia (BNM) kept the overnight policy rate (OPR) at 3.25% when its Monetary Policy Committee (MPC) met yesterday. The central bank, in a statement, said it expects Malaysia’s economic growth to continue in 2019 with support from private sector spending, while inflation would remain low in the immediate term.

BNM also sees stable labour market conditions and capacity expansion in key sectors to continue driving household and capital spending, though support from the external sector is expected to soften in tandem with a moderating global growth momentum.

UOB Malaysia senior economist Julia Goh noted while BNM kept its neutral statement that “at the current level of OPR, the degree of accommodativeness is consistent with the intended policy stance”, the overall tone is particularly cautious on downside risks to growth. She expects BNM to take any pre-emptive action if needed.

In its statement, BNM said “recognising that there are downside risks in the economic and financial environment, the MPC will continue monitoring and assessing the balance of risks surrounding the outlook for domestic growth and inflation”.

Globally, BNM said the growth momentum is showing signs of moderation amid slowing growth in most major advanced and emerging economies.

The central bank said unresolved trade tensions remain a key source of risk, affecting global trade and investment activities. “Tighter global financial conditions and elevated political and policy uncertainties could lead to financial market adjustments, further weighing on the overall outlook.

“We expect two more US Fed (Federal Reserve) rate hikes later this year [in June and December],” Goh wrote in a note. “Thus, our foreign exchange forecasts are tilted towards a moderate US dollar strength. We continue to expect the ringgit to be locked in between 4.05 and 4.10 to the dollar over the near term.”

MIDF Research is maintaining its view that the OPR will remain unchanged at 3.25% this year.The research house, in a note to clients, said a change in monetary stance is not required for now in line with the low core inflation rate as it would affect the domestic growth trajectory.

BNM said inflation is expected to remain low in the immediate term mainly due to policy measures including a lower price ceiling on domestic retail fuel prices until mid-2019, and the impact of the changes in consumption tax policy on headline inflation.

The headline inflation in January 2019 contracted 0.7%, mainly due to negative transport inflation by 7.8% year-on-year (y-o-y) arising from lower global oil prices. The underlying inflation, as measured by core inflation, remained stable at 1.5% in January 2019 reflecting sustained demand conditions.

“For 2019 as a whole, the average headline inflation is expected to be broadly stable compared with that in 2018. The headline inflation trajectory will still be dependent on global oil prices. The underlying inflation is expected to be sustained, supported by a steady expansion in economic activities and in the absence of strong demand pressures,” said BNM.

MIDF Research said for 2019, it foresees the headline inflation rate to average at 2.2% compared with 1% in 2018 due to lower base effects. “We anticipate inflationary pressure mainly from fuel-related items to increase,” it said.