Malaysia's central bank left its benchmark Overnight Policy Rate (OPR) steady at 3.25 percent, as expected, and said it was "closely monitoring and assessing" the implications for domestic inflation and economic growth from heightened risks in the global environment.
The guidance from Bank Negara Malaysia (BNM) - which in January cut its reserve requirement by 50 basis points but has maintained the rate since July 2014 - is practically unchanged from its previous statement when it said it was assessing the implications from heightened global risks on macroeconomic stability and the prospects for the country's economy.
The central bank also repeated that its current policy stance is "accommodative and supportive of economic activity."
The BNM also confirmed that it still expects the economy to expand at a "more moderate" pace in 2016 from 2015's 5 percent growth as domestic demand remains the key driver but added that household spending will be further helped by the 2016 government budget on top of growth in income and employment.
In January the central bank lowered its 2016 growth forecast to 4-4.5 percent from a previous 4-5 percent. In the fourth quarter of last year, Gross Domestic Product grew 1.5 percent from the third quarter for annual growth of 4.5 percent, down from 4.7 percent.
Investment in Malaysia will also continue to be helped by infrastructure development projects and capital spending in the manufacturing and services sectors while the external sectors is seen improving modestly.
Inflation in Malaysia is expected to rise this year from 2015 due to higher administered prices and the impact of the ringgit's weak exchange rate from May 2013 through September 2015.
However, the central bank added that the momentum behind inflation was expected to be slower than it previously anticipated due to the impact of subdued global inflation and the continued lower energy and commodity prices.
In January it said it expected inflation to peak in the first quarter and moderate thereafter. The BNM targets inflation of 2.5 to 3.5 percent this year.
Malaysia's inflation jumped to 3.5 percent in January from 2.7 percent in December for the highest level since March 2014, fueled by a 40 percent hike in tobacco taxes in November.
In April last year the government introduced a 6 percent goods and services tax that also raised inflation but it only hit a peak of 3.3 percent in July 2015 before slipping back below 3 percent the rest of the year.
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. But this year it has firmed and was trading at 4.11 to the dollar today, up 4.6 percent.
The central bank made no references to the departure of its governor, Zeti Akhtar Aziz, who retires at the end of April. The highly-respected Zeti was appointed governor in May 2000 after helping steer the central bank through the Asian financial crises in 1998. She was Malaysia's first female central bank governor.
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. In the advanced economies, growth has been modest and uneven. In most of Asia, domestic demand continues to support economic activity despite the weaker export performance. The international financial markets remain volatile amid shifts in global liquidity and investor sentiments. Looking ahead, while global growth is expected to continue, the outlook is vulnerable to downside risks arising from the prevailing fragilities that are both cyclical and structural, excessive leverage, the sharp declines in commodity prices and the rising geopolitical risks.
In this challenging environment, the Malaysian economy is expected to expand at a more moderate pace in 2016 after registering a 5 percent growth in 2015. The prospects are for domestic demand to remain as the key driver of growth. While private consumption is expected to moderate, household spending will continue to be supported by the growth in income and employment, and the additional disposable income from the measures announced during the 2016 Budget Recalibration. Overall investment will continue to be supported by the implementation of infrastructure development projects and capital spending in the manufacturing and services sectors. The external sector is expected to record a modest improvement and provide additional support to the economy.
For 2016, inflation is expected to be higher compared to 2015, given the adjustments in administered prices and the weaker ringgit exchange rate. The impact of these cost factors is, however, expected to be mitigated by the continued low energy and commodity prices and the generally subdued global inflation. Consequently, the inflation momentum is expected to be slower than earlier anticipated.
Overall domestic financial conditions have remained relatively stable since the previous MPC meeting. Bank Negara Malaysia’s monetary operations continue to ensure that there is sufficient liquidity to support the orderly functioning of the money and foreign exchange markets. The financial system continues to be sound with financial institutions operating with sufficient liquidity buffers. The growth of financing to the private sector has also remained healthy.
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 heightened 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. "