Malaysia Extends Rate Pause as Inflation Cools, Growth Slows

Malaysia left its monetary settings unchanged for a second straight meeting on Thursday, as the central bank opted to weigh the impact of previous interest-rate increases on economic activity amid a challenging global outlook.

(Bloomberg) — Malaysia left its monetary settings unchanged for a second straight meeting on Thursday, as the central bank opted to weigh the impact of previous interest-rate increases on economic activity amid a challenging global outlook.

Bank Negara Malaysia held its overnight policy rate at 2.75%, a decision seen by 11 of 20 economists in a Bloomberg survey, with the rest expecting a 25 basis-point increase.

At this level, the rate remains accommodative and supportive of economic growth, the central bank said in a statement Thursday. BNM “will continue to calibrate the monetary policy settings that balance the risks to domestic inflation and sustainable growth.”

The ringgit was steady against the dollar, erasing earlier gains of around 0.1% after the decision, while the main equities index held losses of 0.2%.

Malaysia was the first in the region to pause its monetary tightening this year as authorities opted to see the impact of past increases on demand in the economy. While it was joined by Indonesia in standing pat, the rate outlook for the region looks poised to change in the wake of an aggressive tightening campaign by the US Federal Reserve to tame inflation.

BNM said while the decision of some central banks to continue raising interest rates will pose headwinds to the global growth outlook, Malaysia’s economy will remain driven by domestic demand.

Having made it clear in the past that its decisions are independent of what other central banks do, BNM said it expects headline and core inflation to moderate over the course of 2023, but still remain elevated.

What Bloomberg Economics Says…

“We see the central bank on hold through at least June. That’s because it will take time to assess the impact of some large crosscurrents: the boost from China’s reopening and fiscal stimulus versus the drag on local and global demand from past monetary tightening.”

— Tamara Mast Henderson, Asean economist

For the full note, click here

The decision shows focus is shifting to growth amid moderating inflation pressures, said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore. But BNM will have to keep an eye on inflation if and when fuel subsidies are cut, he said, referring to Prime Minister Anwar Ibrahim’s pledge to pare subsidy spending. 

Analysts expect another 25 basis points of rate hike next quarter before the central bank goes into a long pause. 

Malaysia’s growth trajectory indicates the country still has scope to tighten. Officials have repeatedly ruled out a recession, counting on domestic demand to anchor its moderating growth through the global slowdown. Anwar, who doubles as finance minister, said he was confident GDP growth this year would exceed the government’s 4.5% forecast.

The government expects inflation to average from 2.8%-3.8% this year, with Anwar warning last month that price pressures could rise if uncertainty surrounding the global supply chain remains unresolved.

–With assistance from Tomoko Sato, Liau Y-Sing, Cecilia Yap and Chester Yung.

(Updates with details)

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