KUALA LUMPUR (May 13): The earlier-than-expected increase in Malaysia’s headline interest rate by 25 basis points (bps) from its record low this month is a step to remove the excess monetary policy accommodation put in place during the pandemic, said Bank Negara Malaysia governor Tan Sri Nor Shamsiah Mohd Yunus.
At BNM and the Department of Statistics Malaysia’s briefing on the country’s first quarter of 2022 (1Q22) economic performance, Nor Shamsiah stressed that it is important to recalibrate Malaysia’s monetary policy now.
“[This is] to avoid having to be aggressive down the road, which is the case with other central banks that are coming up from very low policy rates,” Nor Shamsiah said on Friday (May 13).
The Monetary Policy Committee (MPC) on Wednesday (May 11) raised the overnight policy rate (OPR) by 25bps to 2%, after maintaining the rate at a record low of 1.75% since July 2020.
In 1Q22, Malaysia’s GDP grew 5% year-on-year (y-o-y), as the number of employed individuals rose for the fourth consecutive quarter to 15.57 million while private sector nominal wages rose for the second consecutive quarter by 4.7% y-o-y.
“The OPR needs to be recalibrated with the realities of the ground… the economy is on better footing, there are improvements in the labour market,” Nor Shamsiah said.
On the impact, Nor Shamsiah suggested that the higher rates may encourage the population to save more and rebuild their savings that have been impacted during the Covid-19 pandemic.
Acknowledging higher borrowing costs and pockets of households that will still require assistance, the governor reiterated that targeted repayment assistance is still available.
Price pressure at moderate levels thanks to 'short-term measures'
On a related matter, the central bank does not see any risk of recession in Malaysia at this point, and said that price pressures have remained moderate amid the higher inflation environment.
Rising prices, including commodities and food items, are the prevailing theme globally due to supply chain disruptions and the conflict in Ukraine which pushed up commodity and food prices on the supply side, coupled with rapid reopening in developed economies and subsequent demand increase not matched by supply.
In Malaysia, headline inflation moderated to 2.2% in 1Q22 from 3.2% in 4Q21, but core inflation shot up to 1.7% from 0.8% in the same period.
Presently, price controls or subsidies on fuel and food items have moderated price pressures here, but Nor Shamsiah acknowledged that these are short-term measures.
On the other hand, there is still some slack in the Malaysian economy. Despite the improving labour conditions for example, the unemployment rate of 4.1% is still above the long-term average of 3.4%, said deputy governor Marzunisham Omar.
Aside from long-term measures to improve productivity through efforts like digitalisation and upskilling, Marzunisham said another way forward for the government to improve the efficiency of the measures is through the introduction of targeted subsidies for fuel.
“We also have to look at broadening our tax revenue, as the tax base of the country has been coming down as a percentage of the GDP,” he said.
“[The revival of] GST has been brought up… we are supportive of GST. Of course, we need to think about the timing of the reintroduction, which will be taken into account by the government,” added Marzunisham.