Malaysia's central bank left its benchmark Overnight Policy Rate (OPR) steady at 3.25 percent but cut its Statutory Reserve Requirement Ratio (SRR) by 50 basis points to 3.50 percent to "ensure sufficient liquidity in the domestic financial system, and to support the orderly functioning of the domestic financial markets."
Bank Negara Malaysia (BNM), which last changed its rate in July 2014 when it raised it, underlined that the reserve requirement ratio was "an instrument to manage liquidity and is not a signal on the stance of monetary policy" and its OPR was the "sole indicator used to signal the stance of monetary policy."
Since early 2015, the central bank bank has used monetary operations, including the reverse repurchase facility, to provide liquidity to the banking system because net external outflows reduced the liquidity in the banking system. As of Jan. 21, this amounted to 40 billion Malaysian ringgit.
The central bank repeated it still considers its monetary policy stance to be accommodative but recognizes "heightened risks in the global economic and financial environment" and volatility in financial markets on top of slowing growth in emerging markets and weaker-than-expected growth in advanced economies pose additional downside risks to global and domestic growth.
Malaysia's economy continues to be driven by domestic demand but the contribution of exports is expected to be modest which means the economy should see more moderate growth this year after expanding about 5 percent in 2015.
In the third quarter of 2015, Malaysia's Gross Domestic Product expanded by 4.7 percent year-on-year, down from 4.9 percent in the second quarter.
Malaysia's inflation rate averaged 2.1 percent in 2015 and is expected to be higher in 2016 due to recent changes in administrative prices and the effect of a weaker exchange rate of the ringgit, the central bank said, adding that the impact of these factors will be mitigated by continued low energy and commodity prices, and subdued global inflation.
In December Malaysia's consumer price inflation rate rose slightly to 2.7 percent from 2.6 percent in the previous month and is expected to peak in the first quarter before easing, BNM said.
After depreciating from May through September last year, the ringgit has traded sideways in recent months. At the start of this year it has depreciated slightly and is down 2 percent to 4.39 to the U.S. dollar today.
The BNM noted that "recent external and domestic developments have continued to affect the ringgit exchange rate and domestic financial markets."
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, the recovery in the advanced economies has not been as strong as earlier expected and the growth in the emerging economies has slowed. The current heightened financial market volatility and uncertainties also pose additional downside risks to global growth.
For Malaysia, growth remains driven by domestic demand. While private consumption has moderated as households adjust to the higher cost of living, household spending is being supported by continued growth in income and employment. Overall investment has benefited from the implementation of infrastructure development projects and capital spending in the manufacturing and services sectors despite the lower investment in the oil and gas sector.
Going forward, while recent trends suggest a turnaround in exports, the contribution of the external sector to overall growth is expected to be modest. In this challenging environment, the economy is expected to experience more moderate growth in 2016, after expanding by about 5 percent in 2015. Downside risks to growth have increased following greater uncertainty on both the global and domestic fronts. In confronting this more difficult environment, the Malaysian economy will benefit from having diversified sources of growth, economic flexibility, low unemployment, manageable level of external debt, and a well-capitalised banking system and developed capital markets that provide continued access to financing.
Headline inflation averaged 2.1% in 2015 and is expected to be higher in 2016, given recent adjustments in administrative prices and the weaker ringgit exchange rate. The impact of these domestic cost factors on overall inflation is, however, expected to be mitigated by the continued low energy and commodity prices and the generally subdued global inflation. In terms of trajectory, headline inflation is anticipated to peak in the first quarter of 2016 and to moderate thereafter.
Recent external and domestic developments have continued to affect the ringgit exchange rate and domestic financial markets. The net external outflows have also led to a moderation in domestic liquidity. Bank Negara Malaysia’s monetary operations have ensured that there is sufficient liquidity to support the orderly functioning of the money and foreign exchange markets. The financial system remains sound with financial institutions operating with ample liquidity buffers. Consequently, the growth of financing to the private sector continues to be healthy.
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 in the global economic and financial environment. These risks are being closely 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."
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