This article first appeared in The Edge Financial Daily on July 10, 2019
KUALA LUMPUR: Bank Negara Malaysia (BNM) decided to keep the overnight policy rate (OPR) at 3% after the monetary policy committee (MPC) meeting yesterday.
While the central bank said the stance of monetary policy remains accommodative and supportive of economic activity, it acknowledged that there are “some signs of tightening of financial conditions” and that growth projections are subject to downside risks from global uncertainties, worsening trade tensions and commodity weakness.
BNM added that the MPC will continue to assess the balance of risks to domestic growth and inflation to ensure that the monetary policy stance remains conducive to sustainable growth amid price stability.
The central bank’s decision to keep the OPR on hold at 3% was in line with most economists’ expectations, including that of UOB Malaysia senior economist Julia Goh.
Goh said UOB Malaysia is keeping its year-end target for the OPR at 3%, implying no further cuts this year.
This is premised on a better growth trajectory in the second half of the year, and assuming protracted negotiations between the US and China will produce some resolutions, although existing tariffs may not be removed.
“We expect the domestic economy to be propped up by a revival of key infrastructure projects, policy clarity, looser monetary policy and a lower base effect. Domestic conditions will be supported by stable labour market conditions and capacity expansion in key sectors that will drive household and capital spending,” she added.
Similarly, OCBC Bank economist Alan Lau said while its base case is still for BNM to hold the benchmark rate for the rest of 2019, additional cuts are not ruled out if growth risks worsen. This is as the central bank has emphasised the downside risks to growth.
“[However,] we probably may still have to wait further down the road before we get an idea of how much such risks have worsened given the current trade truce between the US and China,” he added.
Meanwhile, in a note, MIDF Research said the unchanged OPR was within its expectations, noting that the 25-basis-point cut in May 2019 is sufficient to boost economic growth, particularly domestic demand.
“The rate cut in May would improve domestic consumption activity and investment, particularly in the second half of 2019 (2H19),” it added.
MIDF Research added that the strong momentum in private consumption and the services sector will drive Malaysia’s economy into a good position in 2019, in addition to leading indicators such as the leading index and business tendency survey, which are pointing towards a better growth trajectory in 2H19.
In a statement, the central bank said: “The global economy continues to expand moderately. Labour conditions in the advanced economies remain firm, while domestic demand continues to support growth in Asia. Leading indicators, however, point to a softening of the near-term global economic outlook, with considerable downside risks remaining primarily from prolonged trade tensions.
“While the prospect of monetary easing in the major economies has somewhat eased global financial conditions, heightened policy uncertainty could lead to excessive financial market volatility.”
Looking ahead, BNM is positive that economic growth will be supported by domestic demand, even though the external sector’s performance is likely to be weighed down by slower global growth and trade tensions.
“Household and capital spending will continue to be driven by stable labour market conditions and capacity expansion in key sectors, such as manufacturing and services.
“The baseline projection remains within the range of 4.3% to 4.8%. This projection, however, is subject to downside risks from ongoing uncertainties in the global and domestic environments, worsening trade tensions and extended weakness in commodity-related sectors,” said the central bank.
Headline inflation projected to rise
BNM added that while headline inflation had remained low in the recent period, it is projected to rise in the coming months as the impact of the changes in consumption tax policy lapses.
Nevertheless, for 2019 as a whole, BNM said average headline inflation is expected to be broadly stable compared with 2018.
“The trajectory of headline inflation will be dependent on global oil prices and policy measures, such as the timing of the lifting of the price ceiling on domestic retail fuel prices. Underlying inflation is expected to remain stable, supported by continued expansion in economic activity and in the absence of strong demand pressures,” BNM said.