Malaysia’s Overnight Policy Rate (OPR) is projected to remain steady at 3% throughout 2024, as the nation experiences a moderation in Producer Price Index (PPI) inflation. In August 2024, the PPI inflation rate slowed to 0.3% year-on-year (y-o-y), down from 1.3% y-o-y in the previous month, signaling a shift in local production costs.
The Producer Price Index (PPI) measures price changes at the producer level and is a key indicator of inflationary pressure in the economy. The slowdown in PPI inflation suggests that recent policy changes, such as the rationalization of the diesel subsidy, have had a limited impact on production costs.
Easing Inflationary Pressures
According to MIDF Research, the research arm of MIDF Amanah Investment Bank Bhd, the ongoing moderation in inflation reflects broader stability in Malaysia’s economic environment.
“With inflation still under control, we do not foresee the OPR being adjusted this year,” the research firm noted in its recent report.
This analysis comes in response to data from the Department of Statistics Malaysia (DOSM), which revealed that the August 2024 PPI increase was the slowest in the past six months. Lower commodity prices, particularly in the energy sector, have been instrumental in easing inflationary pressures.
Declining Commodity Prices
One of the key factors driving the slowdown in PPI inflation was a significant drop in global crude oil prices. In August, Brent crude oil prices fell by 7.3% y-o-y, with the average price per barrel dropping to US$78.88. The moderation in oil prices has helped to alleviate cost pressures for producers, resulting in the slower rise in PPI inflation.
This decline in commodity prices offers some breathing room for businesses and producers, allowing them to manage costs more effectively. In turn, this stability in production costs is expected to help maintain overall price stability for consumers.
OPR Stability Supports Economic Growth
Given the easing inflationary trends and manageable production costs, MIDF Research anticipates that Malaysia’s central bank, Bank Negara Malaysia (BNM), will keep the OPR at 3% for the remainder of 2024.
The current OPR level supports borrowing affordability for both businesses and consumers, fostering steady economic growth. Stable interest rates ensure consistent borrowing costs for mortgages, loans, and development financing, which is crucial for sustaining the nation’s economic momentum.
Moreover, this stable rate environment reassures households and businesses that their financial commitments, such as loans with floating interest rates, will not experience sudden increases, thereby maintaining financial stability.
Future Outlook
Looking ahead, Malaysia’s economic outlook appears positive, with the moderating PPI and steady OPR providing a strong foundation for continued growth. The easing of inflationary pressures is particularly encouraging for the manufacturing sector, as lower production costs can help drive increased output and competitiveness.
As commodity prices remain controlled and inflation continues to moderate, BNM is expected to prioritize economic stability by maintaining its current monetary policy stance.
In summary, Malaysia’s OPR is set to remain at 3% for the rest of 2024, as PPI inflation shows signs of easing. The decline in commodity prices, especially in the energy sector, has alleviated production cost pressures, allowing for a stable economic outlook. With inflation under control, the current OPR supports continued growth and financial stability for businesses and households alike.
