Malaysia holds rates but eyes heightened global risks

    Malaysia's central bank maintained its benchmark Overnight Policy Rate (OPR) at 3.25 percent but said it was carefully monitoring the implications for the economy and macroeconomic stability from the "heightened risks to global growth and financial conditions."
     Bank Negara Malaysia (BNM), which last raised its rate by 25 basis points in July 2014, said its current policy stance remains accommodative and supportive of economic activity but acknowledged that recent global and domestic developments had affected the exchange rate of the ringgit.
     The ringgit has been depreciating since late April, hitting lows not seen in 16 years, on a combination of a strengthening U.S. dollar, weaker growth in emerging markets and controversy over the government's investment fund 1MDB and allegations of money transfers to the personal accounts of Malaysian Prime Minister Najib Razak.
     Today the ringgit was trading at 3.78 to the dollar, down 7.4 percent this year and down 13.5 percent since the start of 2014.
    However, the central bank added that there was ample liquidity in the domestic financial system and financial and foreign exchange markets continued to function in an orderly manner. Financial institutions also have strong capital and liquidity buffers and credit growth is healthy.

    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.

The global economy continues to expand at a moderate pace. While growth across the advanced economies has improved, it has remained modest. In most of Asia, domestic demand continues to support growth despite weaker exports. Looking ahead, the recovery in global growth performance has, however, become vulnerable to increased downside risks. International financial markets have also become more volatile following increased concerns over developments in Europe and continued policy uncertainties in several major advanced countries.  There are also downside risks to growth in the major Asian economies.

For Malaysia, the latest indicators point to continued expansion of the economy in the second quarter, albeit at a more moderate pace. Overall growth continues to be underpinned by domestic demand. Growth in private consumption is expected to be slower following the frontloading of consumption activity prior to the implementation of the Goods and Services Tax (GST) in the first quarter. While households are expected to continue adjusting to the GST in the immediate future, overall spending will be supported by continued wage growth and stable labour market conditions. Investment activity is projected to be driven by capital spending in the manufacturing and services sectors, as well as for infrastructure projects. These developments will contribute towards offsetting the weaker performance of the external sector. On balance, the prospects are for the Malaysian economy to remain on a steady growth path, with domestic demand being the key driver of growth.

Headline inflation averaged at 2% in April and May. Going forward, headline inflation is expected to be higher following the impact of the GST and the recent adjustments to domestic fuel prices, before moderating towards the second half of 2016. Nevertheless, underlying inflation is expected to remain contained amid stable domestic demand conditions.

While recent global and domestic developments have affected the ringgit exchange rate and domestic financial markets, there remains ample liquidity in the domestic financial system with continued orderly functioning of the financial and foreign exchange markets. The financial institutions are also operating with strong capital and liquidity buffers. Access to financing has continued with credit growth remaining at healthy levels. Financial intermediation has therefore continued to support the economy.

At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity. The MPC recognises that there are heightened risks to global growth and financial conditions.  These risks are being carefully monitored to assess their implications on macroeconomic stability and the prospects of the Malaysian economy. This is to ensure that the monetary policy stance is consistent with the sustainability of the overall growth prospects.

Schedule of MPC meetings
Due to the revised schedule of international meetings, the September MPC meeting has been rescheduled to Thursday 10 September and Friday 11 September 2015, from Wednesday 2 September and Thursday 3 September 2015."

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