Malaysia's central bank left its benchmark Overnight Policy Rate (OPR) unchanged at 3.25 percent, a level it considers accommodative, and repeated that it is carefully monitoring heightened risks in the global and financial environment and their implications for the country's economy.
Bank Negara Malaysia (BNM), which last raised its rate by 25 basis points in July 2014, said downside risks to global growth and domestic growth had risen but the country was entering "this challenging period" from a position of strength and it still expects growth this year of 4.5 to 5.5 percent, down from 2014's growth of 5.9 percent.
Recent data suggest continued expansion in economic activity in the third quarter of this year though private consumption is expected to moderate due to the implementation of the 6 percent Goods and Services Tax (GST) in April and the more uncertain economic environment.
Malaysia's Gross Domestic Product rose by 1.1 percent in the second quarter from the first quarter for annual growth of 4.9 percent, down from 5.6 percent in the first quarter.
Malysia's headline inflation rate rose to 3.3 percent in July from 2.5 percent in June due to higher domestic fuel prices and the impact of GST.
Despite the decline in the ringgit's exchange rate, BNM said the impact on inflation has been limited by lower commodity prices and low global inflation. Headline inflation is expected to peak in early 2016 and then moderate the rest of the year.
"While global and domestic developments have continued to affect the ringgit exchange rate and domestic financial markets, overall domestic liquidity conditions remain stable," the bank said.
The ringgit has been depreciating against the U.S. dollar since August last year but the pace of its decline has picked up speed in the last month. Today the ringgit was trading at 4.29 to the dollar, down 18 percent this year.
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. Although growth across the advanced economies has improved, it has remained modest. In most of Asia, while there has been a moderation in growth, domestic demand continues to support economic activity. Looking ahead, while the global economic recovery is expected to continue, the downside risks to growth have increased arising from the moderating growth momentum in the major emerging market economies, uncertainty in commodity prices and the heightened volatility in financial markets.
For Malaysia, recent indicators suggest continued expansion in economic activity in the third quarter despite ongoing adjustments to external and domestic developments. Private consumption is expected to moderate as households continue to adjust to the implementation of the Goods and Services Tax (GST) and the more uncertain economic environment. Household spending will however be supported by wage growth and stable labour market conditions. Investment activity is projected to be led by capital spending in the manufacturing and services sectors, and ongoing infrastructure projects. The continued expansion in domestic demand is expected to contribute towards mitigating the weak performance of the external sector. Going forward, downside risks to growth, however, have risen amid greater uncertainty on both the global and domestic fronts. Of significance, Malaysia is entering this challenging period from a position of strength given the diversified sources of growth of the economy, low unemployment level, manageable level of external indebtedness, and a well-capitalised banking system. The assessment is therefore for the economic growth to remain within the region of 4.5 to 5.5 percent.
Headline inflation averaged at 2.9% in June and July reflecting higher domestic fuel prices and the impact of the GST. Despite the weaker ringgit exchange rate, the impact on overall inflation has been limited by the lower commodity prices and the generally low global inflation. Moving forward, headline inflation is expected to peak in early 2016 and it will moderate for the remainder of the year.
While global and domestic developments have continued to affect the ringgit exchange rate and domestic financial markets, overall domestic liquidity conditions remain stable. The financial system remains sound, with healthy growth in financing. Financial intermediation has therefore continued to support the economy.
The ringgit exchange rate is being affected by global factors that are affecting many emerging and commodity producing economies. These factors include the weaker commodity prices, the strength of the U.S. dollar, and the uncertainty in the global financial markets. The ringgit exchange rate will reflect the underlying fundamentals of the economy when the external and domestic uncertainties recede. Bank Negara Malaysia will continue to ensure the orderly functioning of the money and foreign exchange markets.
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 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."