Malaysia holds rate but sees downside global risks

    Malaysia's central bank kept its benchmark Overnight Policy Rate (OPR) steady at 3.25 percent and repeated its view that its current monetary policy stance was accommodative and supportive of economic activity.
    Bank Negara Malaysia (BNM) also said it recognized "downside risks" in the global environment that it was closely monitoring, a slight shift in language from its previous statement in March when it noted "heightened risks."
    Malaysia's economy slowed slightly in the first quarter of this year to annual growth of 4.2 percent from 4.5 percent in the fourth quarter of 2015, but in line with the central bank's view.
    For the full year, BNM confirmed its growth forecast of 4-4.5 percent, down from 2015's 5.0 percent.
    Private consumption is expected to expand further this year while private investment has eased due to lower activity in the oil, gas and commodities sectors, and exports will be limited by the weak global economy, BNM said.
    It was the first statement by the central bank's Monetary Policy Committee since Muhammad Ibrahim this month took over as governor from Zeti Akhtar Aziz, who had led the BNM for 16 years. Muhammad had been deputy governor since 2010.
   The central bank has maintained its rate since July 2014 when it was raised it by 25 basis points.
   Malaysia's inflation rate eased to 2.6 percent in March from 4.2 percent in February for an average rate of 3.4 percent in the first quarter and is expected to trend lower for the rest of the year due to low energy and commodity prices.
    The BNM, which targets inflation of 2.5-3.5 percent this year, dropped its previous references to inflation rising this year from last year.
    The central bank had expected inflation to pick up this year due to higher administered prices, which included a 40 percent hike in tobacco prices in November along with a 6 percent goods and services tax in April last year, along with the impact on import prices from the weak ringgit from May 2013 through September 2015.

    Malaysia's ringgit fell in May 2013, triggered by the "taper tantrum", until September that year before rebounding. But it then fell for the next 12 months and lost 19 percent against the U.S. dollar in 2015. 

    This year the ringgit started out on a firm note but since mid-April it has eased. Today the ringgit fell further and was was trading at 4.09 to the dollar,  still up 5.1 percent since the start of 2016.

    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.

Global economic expansion continues, albeit at a more moderate pace, across major advanced and emerging market economies in the first quarter of the year. In Asia, domestic demand remains the key contributor to growth amid continued weakness in the external sector. Volatility in the international financial markets has receded and investor sentiments have improved, although this is susceptible to policy and market developments. Looking ahead, structural issues and geopolitical developments will continue to constrain growth of the global economy despite the highly accommodative monetary conditions.

For Malaysia, growth moderated slightly in the first quarter of the year, in line with earlier expectations. Going forward, economic activity is expected to improve with domestic demand remaining the key driver of growth. Private consumption is expected to expand further, supported by continued growth in wages and employment, and the additional disposable income from measures announced during the 2016 Budget Recalibration. While the growth of private investment has moderated due to lower investment by the oil and gas industry and commodities sector, overall investment activity will remain supported by the implementation of infrastructure projects and capital spending in the manufacturing and services sectors. The external sector will continue to be constrained by weak external environment. The prospects are therefore for the economy to expand by 4-4.5% in 2016.

Inflation averaged 3.4% in the first quarter of 2016, and is expected to trend lower for the rest of the year due to the low energy and commodity prices and the generally subdued global inflation. 

Overall domestic financial conditions have remained stable. The financial system continues to be sound, with improved liquidity in the domestic financial system, continued orderly functioning of the financial and foreign exchange markets, and financial institutions operating with strong capital and liquidity buffers. The growth of financing to the private sector is consistent with the pace of economic activity and financing conditions remain supportive of economic growth.

At the current level of the OPR, the stance of monetary policy is accommodative and supportive of economic activity. The MPC recognises that there are downside risks in the global economic and financial environment and is closely monitoring and assessing their implications on domestic price stability and growth. This is to ensure that the monetary policy stance is consistent with sustainable growth of the Malaysian economy.

The MPC also decided for future Monetary Policy Statements to be released at 3:00 p.m. on the second day of the MPC meeting."

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