28 Jan

Malaysia holds rate, assessing external developments

January 28, 2015

By CentralBankNews.info
    Malaysia’s central bank maintained its Overnight Policy Rate (OPR) at 3.25 percent, as widely expected, saying it would “carefully assess the external developments and their implications on the Malaysian economy” and “monitor the risks of destabilizing financial imbalances.”
    Bank Negara Malaysia (BNM), which raised its rate by 25 basis points in July 2014, added that the prospects for the country’s economy remain on a “steady growth path,” a phrase the central bank often uses to describe economic activity.
    However, the BNM’s reference to external developments clearly indicates growing concern over the downside risks to the global economic outlook along with increased volatility in international financial markets and heightened uncertainty with regard to global growth prospects and the decline in commodity prices.
    Nevertheless, the BNM expects the global economy to benefit from lower oil prices.
    In its December statement, the BNM pointed to the outlook for domestic growth and inflation along with the risks of destabilizing financial imbalances.
   The BNM still sees domestic demand as the key driver of economic growth due to a steady rise in income and employment along with the boost to disposable income from lower oil prices.
    Although the central bank expects its exports to be affected by lower commodity prices, it sees an improvement in the export of manufactured products.

    Lower oil and energy prices are also expected to push down inflation, which will remain somewhat volatility due to changes in oil prices, but underlying inflation is seen stable amid moderate demand.
    Malaysia’s consumer price inflation eased to 2.7 percent in December from 3.0 percent in November while its Gross Domestic Product expanded by 0.9 percent in the third quarter of 2014 from the second quarter for annual growth of 5.6 percent, down from 6.5 percent.

    Bank Negara Malaysia issued the following statement:
   
“At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.


While the global economy continues to expand at a moderate pace, there has been increasing divergence in the growth momentum among the major economies. For most of Asia, growth is supported by the continued expansion in both domestic and external demand. Looking ahead, despite the varying impacts of the significantly lower oil prices on economies, the overall global economy is expected to benefit from this development. Nevertheless, the downside risk to the global economic outlook has increased following the weakening growth momentum in a number of major economies due to external and domestic specific factors.
Volatility in the international financial markets has increased amid shifts in global liquidity and heightened uncertainty particularly with regard to global growth prospects and the decline in commodity prices. While the Malaysian financial markets have been affected by these global developments, there has been no disruption to financial intermediation. There remains ample liquidity in the domestic financial system with continued orderly functioning of the financial markets. The banking institutions are operating with strong capital and liquidity buffers, and continue to provide financing to the economy.
For Malaysia, economic activity continues to be supported by growth in domestic demand amid a moderation in exports in the fourth quarter of 2014. Going forward, domestic demand will remain as the key driver of growth. While private consumption is expected to moderate, it will remain supported by the steady rise in income and employment, and the additional disposable income from the lower oil prices. Investment activity is projected to remain resilient, with broad-based capital spending by both the private and public sectors cushioning the lower oil and gas-related investment activity. While export growth will be affected by lower commodity prices, the performance of manufactured exports is expected to improve. The prospects are therefore for the Malaysian economy to still remain on a steady growth path.
Inflation for 2015 is expected to be lower than earlier anticipated due to the lower energy and commodity prices. The projected lower energy prices will partially offset other domestic cost factors. With the implementation of the managed float pricing mechanism for fuel, the outlook for headline inflation would be subjected to the volatility of oil prices. Nevertheless, the expectation is for underlying inflation to remain relatively stable, amid the more moderate demand conditions.
At the current level, the stance of monetary policy remains accommodative and is assessed to be appropriate given the developments in monetary and financial conditions. The MPC will continue to carefully assess the external developments and their implications on the Malaysian economy. The MPC will also continue to monitor the risks of destabilising financial imbalances. This is to ensure that the monetary policy stance is consistent with the sustainability of the growth prospects of the Malaysian economy.”

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