Bank Negara Malaysia (BNM) has chosen to maintain its overnight policy rate (OPR) at 3% during its most recent Monetary Policy Committee (MPC) meeting, marking the third consecutive session where the OPR remains unchanged. Despite some calls for a rate hike to stabilize the ringgit, which has reached a 25-year low against the US dollar, BNM has opted to maintain the status quo since its last rate hike in May, when the OPR was raised by 25 basis points to 3%.
BNM’s decision comes alongside a positive outlook for the Malaysian economy. According to the central bank, the advance gross domestic product (GDP) estimate indicates an improvement in economic activity in the third quarter. The growth in 2024 is anticipated to be driven primarily by resilient domestic expenditure, supported by the expected recovery in electrical and electronic (E&E) exports. Additionally, continued employment and wage growth are expected to bolster household spending, while tourist arrivals and spending are predicted to improve further.
BNM emphasized that investment activity will receive support from the ongoing progress of multi-year infrastructure projects and the implementation of catalytic initiatives under national master plans. Measures outlined in Budget 2024 are expected to provide an additional boost to economic activity.
While the growth outlook remains susceptible to downside risks, including weaker-than-expected external demand and extended declines in commodity production, there are also upside risks to growth, mainly arising from stronger-than-expected tourism activity, a more robust recovery from the E&E sector downturn, and expedited implementation of existing and new projects, as outlined by BNM.
In light of these factors, BNM stated that the MPC will remain vigilant, closely monitoring developments to assess the outlook for domestic inflation and growth. The central bank is committed to ensuring that the monetary policy stance continues to support sustainable economic growth while maintaining price stability.
With the current OPR level, BNM emphasized that the monetary policy stance remains supportive of the economy and aligns with the current assessment of inflation and growth prospects.
Looking ahead to 2024, BNM anticipates that inflation will remain modest, with both headline and core inflation having eased due to reduced cost pressures. In the third quarter, headline inflation averaged at 2%, while core inflation stood at 2.5%.
BNM cautioned that the inflation outlook remains sensitive to changes in domestic policies related to subsidies and price controls, as well as global commodity prices and financial market developments. The government’s plan to review price controls and subsidies in 2024 is expected to impact the inflation and demand outlook.
On the global front, despite signs of recovery in the electrical and electronic (E&E) sector, BNM highlighted that global trade remains soft due to a shift in consumer spending from goods to services and ongoing trade restrictions. Global growth continues to be hampered by elevated inflation and higher interest rates in several major economies, contributing to slowing growth momentum.
The central bank anticipates that the monetary policy stance of most central banks will remain tight, given the ongoing risks, including higher-than-anticipated inflation, geopolitical tensions, and tightening financial market conditions.
Regarding the currency market, BNM attributed the persistently strong US dollar to expectations of a prolonged period of higher interest rates in the United States and growing concerns over escalating geopolitical tensions. This has affected various major and emerging-market currencies, including the Malaysian ringgit.
Nevertheless, BNM assured that these currency market developments are not expected to derail Malaysia’s growth prospects. The central bank remains committed to managing risks of increased volatility, including providing liquidity to ensure the orderly functioning of the domestic foreign exchange market. It also noted that financial institutions in Malaysia continue to operate with robust capital and liquidity buffers, while domestic financial conditions remain conducive to sustaining credit growth.
As of the time of writing, the ringgit had strengthened by 0.38% against the US dollar at 4.7533. On October 23, the ringgit had hit a low of 4.7937 against the US dollar, and year-to-date, the currency has depreciated by 7.9%.