KUALA LUMPUR (Apr 29): Malaysian policymakers walk a tight rope this year as options for policy manoeuvres are limited in the face of slowing growth and high inflation, said DBS Group Research.

As such, in a report today, the research firm said the only realistic option for the country so far is to continue focusing on the medium-term while praying for further recovery in the global economy in the shorter term.

This is because it is of the view that the central bank's hands are tied when it comes to changing monetary policies due to high household debt and ringgit depreciation.

“The central bank has to remain vigilant given household leverage and the inflationary impact of the goods and services tax (GST) hike. Thanks in large part to property purchases, household debt has risen to a multi-year high of 88% of gross domestic product (GDP). Any reduction in interest rates could lift this further,” it said.

Further, it said Bank Negara has to manage the downward pressure on the ringgit, Asia’s second-worst performer year-to-date.

“With the risk of a rating downgrade juxtaposed against fairly high foreign holding of MGS of about 44%, any cut in interest rates would likely exacerbate ringgit weakness,” said the research firm.

The best option, it said, was for the central bank to keep policy on a “steady keel” with the overnight policy rate maintained at the current 3.25%.

Fiscal policy options are likewise limited, it said, noting that the government had aimed to lower public deficit to 3% of GDP by 2015 and bring a balanced budget by 2020, but the decline in oil prices has thrown a spanner in the works.

The saving grace is that Malaysia has made significant progress in fiscal reform. The wasteful subsidy programme has been abolished and the tax regime has been broadened with the introduction of the GST. Nonetheless, the economy is on fiscal consolidation mode and there is precious little room for pump-priming.

“Policymakers walk a tight rope as they pursue economic transformation while maintaining fiscal prudence. Fiscal policy is likely to remain focused on tackling medium-term structural issues rather than short-term,” said DBS Group Research.

“For Malaysia, the only realistic option is to continue focusing on the medium-term while praying for further recovery in the global economy in the shorter term,” it added.