Bank Negara Malaysia (BNM), which raised its rate by 25 basis points in July for the first time since May 2011, added that it would remain vigilant to risks of financial instability, and adopted a more neutral policy stance by omitting its guidance from September that it may make further adjustments to its degree of monetary accommodation depending on how the economy develops.
Citing growing downside risks to the global economy, BNM said Malaysia's exports had shown signs of moderation and private consumption is expected to moderate but investment activity is expected to remain robust and domestic demand will continue to remain the key driver of growth.
"While the moderating trends will affect the overall growth prospects, the Malaysian economy is still projected to remain on a steady growth path," the central bank said.
The central bank's comments echo those by its governor, Zeti Akhtar Aziz, last month in an interview in Washington when she said Malaysia's economy was likely to keep expanding at a solid clip despite softer global growth and still requires the support of low interest rates.
Zeti forecast economic growth in the range of 5-6 percent into 2015 and the country's finance minister's 2015 budget forecasts growth of 5.5 to 6.0 percent that year. In the second quarter of this year, Malaysia's Gross Domestic Product (GDP) expanded by 1.8 percent from the first quarter for annual growth of 6.4 percent, up from 6.2 percent in the first quarter.
Malaysia's inflation rate has been boosted by the impact of higher utility and energy costs and the central bank expects inflation to trend higher for the rest of this year and remain above its long-term average of 3.2 percent due to domestic costs.
"However, the absence of external price pressures and more moderate demand conditions are expected to mitigate the impact of these cost factors on the underlying inflation," BNM said.
Malaysia's headline inflation rate eased to 2.6 percent in September from 3.3 percent in August
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. Growth across the advanced economies has been uneven. In Asia, growth is being sustained by the continued expansion in domestic demand and exports. Looking ahead, while the overall global growth momentum is expected to improve, the growth forecast has been revised downwards due to weakening economic activity in a number of major economies. Consequently, the downside risks to global growth have increased. Volatility in the international financial markets has also risen.
For Malaysia, while domestic demand has continued to support growth, exports have shown signs of moderation. Going forward, domestic demand will still remain the key driver of growth. Private consumption is expected to moderate, but investment activity is projected to remain robust, supported by broad-based capital spending by both the private and public sectors. While the moderating trends will affect the overall growth prospect, the Malaysian economy is still projected to remain on a steady growth path.
Inflation is projected to trend higher for the remainder of the year and will continue to be above its long-term average next year due to domestic cost factors. However, the absence of external price pressures and more moderate demand conditions are expected to mitigate the impact of these cost factors on the underlying inflation.
The current stance of monetary policy remains accommodative and is assessed to be appropriate given the developments in monetary and financial conditions. Moving forward, the MPC will continue to carefully assess the balance of risks surrounding the outlook for domestic growth and inflation. The MPC will also remain vigilant to 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.
The meeting also approved the schedule of MPC meetings for 2015. In accordance with the Central Bank of Malaysia Act 2009, the MPC will convene six times during the year. The meetings will be held over two days, with the Monetary Policy Statement released at 6 p.m. on the second day of the MPC meeting."