Wednesday, March 7, 2018

Malaysia keeps rate, sees easing inflation, strong growth

      Malaysia's central bank left its benchmark Overnight Policy Rate (OPR) at 3.25 percent, as widely expected following January's hike, and said economic growth is expected to remain strong this year while inflation on average should be lower than last year.
      In January Bank Negara Malaysia's (BNM) raised its rate by 25 basis points in the first move to tighten since July 2014. However, BNM also said its policy stance remained accommodative.
      Today BNM struck a neutral tone in its outlook, saying the current rate was consistent with steady economic growth amid lower inflation.
      Malaysia's headline inflation rate eased to 2.7 percent in January from 3.5 percent in December and an average 2017 rate of 3.7 percent. Core inflation has been steady at 2.2 percent from November through January.
       BNM expects a stronger exchange rate for the ringgit to mitigate higher import costs and thus inflation from higher energy and commodity prices. However, headline inflation will depend on global oil prices, "which remain highly uncertain."
       Malaysia's economy is expected to be supported by continued global growth and while risks to the global outlook remain balanced, the central bank noted the recent increase in "trade tensions" and changes in financial markets that "indicated that volatility may emerge."
       In addition external demand, Malaysia's economy should be supported by domestic demand, boosted by capital investment in manufacturing and services and new and ongoing infrastructure projects.
       Malaysia's economy is estimated to have expanded by 5.5 to 6.0 percent in 2017 and both the government and International Monetary Fund project growth this year of 5.0 to 5.5 percent.
       Malaysia's ringgit has been appreciating steadily since early 2017 although it eased in the first week of February. Today the ringgit was trading at 3.90 to the U.S. dollar, up 3.6 percent this year.

      Bank Negara Malaysia issued the following statement:

"At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.
The global economy continues to strengthen. Global trade is showing strong growth momentum. In the advanced economies, rising wages and policy support will provide further impetus to growth. In Asia, growth will be driven by sustained domestic activity and strong external demand. Recent adjustments in the financial markets, though short-lived, indicate that volatility may reemerge. Trade tensions have also risen in the recent period. At this point, risks to the global growth outlook remain balanced, pointing towards continuity in global economic expansion.
For Malaysia, the strong growth performance in the fourth quarter of 2017 continued to be anchored by private sector spending. Looking ahead, growth prospects will be sustained by the positive global growth outlook and spillovers from the external sector to the domestic economy. Domestic demand will remain the key driver of growth, underpinned by favourable income and labour market conditions, spending on new and ongoing infrastructure projects and sustained capital investment by firms in the manufacturing and services sectors. With additional impetus from the external sector, growth is expected to remain strong in 2018.
Inflation is projected to average lower in 2018, on expectations of a smaller effect from global cost factors. A stronger ringgit exchange rate compared to 2017 will mitigate import costs. Global energy and commodity prices are expected to trend higher in 2018, but at a more moderate pace relative to the previous year. However, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, is also projected to moderate due to improving labour productivity and ongoing investments for capacity expansion.
The domestic financial markets have been resilient. The broad appreciation of the ringgit in the past year better reflects the economic fundamentals. Banking system liquidity remains sufficient with financial institutions continuing to operate with strong capital and liquidity buffers. The growth of financing to the private sector has been sustained and is supportive of economic activity.
At the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid lower inflation. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation."


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