KUALA LUMPUR (June 13): The World Bank Group said on Monday (June 13) the impact of rising interest rates in the US is expected to be less severe for Malaysia compared to other East Asia and Pacific (EAP) countries due to factors including Malaysia's flexible exchange rate and large international reserves.

"Financial tightening shocks emanating from the US can have negative spillovers to output in the broader EAP region, including Malaysia. However, Malaysia has several factors in its favour that tend to reduce the severity of such shocks due to its flexible exchange rate; low US dollar-denominated external debt (0.9% of GDP); large international reserves (US$115.6 billion or 5.9 months of import cover); and a deep domestic institutional investor base.

“[Economic] recovery prospects are also promising, with the economy opening up, and with higher commodity prices. BNM’s (Bank Negara Malaysia) recent increase of its policy rate also builds more monetary space in the event of future adverse shocks. On the other hand, Malaysia’s narrowing fiscal space limits the government’s ability to cushion the impact of any new negative shocks,” the World Bank said in its June 2022 Malaysia Economic Monitor report.

Meanwhile, the World Bank said Malaysia’s economy, as measured by GDP, is projected to expand 5.5% in 2022 from a year earlier, driven mainly by a robust rebound in consumption demand.

The World Bank said Malaysia’s private consumption growth is forecast to reach 8.5% in 2022, its fastest pace since 2008. 

"This strong recovery in household spending is premised on further dissipation of public health concerns in absence of a severe resurgence of Covid-19 caseloads, as well as continued policy support and gradual improvements to employment and income prospects,” the World Bank said.

The World Bank said Malaysia’s GDP is projected to expand 5.5% in 2022 after growing 3.1% in 2021.

Looking ahead, the World Bank said it expects Malaysia’s GDP to expand 4.5% in 2023 and 4.4% in 2024. 

Malaysia’s inflation, as measured by the consumer price index (CPI), is projected to increase. The World Bank said the country’s headline CPI is projected to increase but remain relatively manageable at between 2.5% and 3.5% in 2022 compared to 2.5% in 2021.

"This forecast assumes that the ceiling on retail fuel prices and price controls on selected food items remain unchanged throughout the year, limiting the upward pressure in inflation from higher global oil and food prices.

"Underlying inflation (which excludes volatile food and energy prices), however, is expected to average higher this year, reflecting the broadening of price pressures from higher commodity prices, various constraints on supply, as well as the continuing recovery in demand and narrowing degree of spare capacity in the economy,” the World Bank said.

World Bank lead economist for Malaysia Dr Apurva Sanghi fielded questions at a virtual media briefing on Monday in conjunction with the World Bank's June 2022 Malaysia Economic Monitor report publication.

Reporters had asked Apurva whether the World Bank expects BNM to further raise interest rates in 2022.

"I believe BNM is more concerned about stability and volatility than maintaining the Malaysian ringgit per se. 

"We therefore expect future movements in the OPR (overnight policy rate) to be largely driven by domestic economic conditions to respond to forex (foreign exchange) volatility, preferably at a gradual and measured pace," he said.

On May 11, 2022, BNM's Monetary Policy Committee increased the OPR by 25 basis points to 2% from a record low of 1.75% as global inflationary pressures have increased sharply and after taking into account that the sustained reopening of the global economy and improvement in labour markets continue to support the recovery of economic activity from the impact of Covid-19-driven movement restrictions.

"Inflationary pressures have increased sharply due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the US.

"For the Malaysian economy, latest indicators show that growth is on a firmer footing, driven by strengthening domestic demand amid sustained export growth," BNM said in a statement then.

According to Apurva on Monday, interest rate policy alone cannot safeguard a country’s economic growth.

He said economic growth ultimately depends on investments or structural reforms, which trigger a supply response to manage the current economic environment.

“Policies beyond interest rates, in particular supply side policies, need to do the heavy lifting. So, increasing interest rates cannot solve supply chain bottlenecks. They cannot get you more chicken, they cannot get you more computer chips. So, this has nothing to do with increasing interest rates. 

"And finally, for a central banker, no matter where in the world, it's not so much important to realise inflation as it is to realise inflation expectations, because if inflation expectations are high today, they can lead to high inflation tomorrow. 

"So monitoring inflation expectations and managing them will be critical going forward," Apurva said.

On Malaysia, Apurva said the country’s potential interest rate hikes should be seen as a broader step toward global monetary policy normalisation and preventing inflation expectations from becoming entrenched.

Read also:
GST better than SST ⁠— World Bank