The Malaysian central bank, Bank Negara Malaysia (BNM), is set to leave its key interest rate unchanged as growth remains strong and inflation remains under control, according to a recent poll conducted by Reuters. Despite the fact that inflation is currently at 2.0%, the Malaysian ringgit has shifted from being one of the weakest performing Asian currencies to one of the strongest in recent weeks. This shift indicates that the central bank is not likely to make any immediate rate cuts, as it aims to prevent currency depreciation and inflation importation.
All 30 economists surveyed in the Aug. 27-Sept. 2 poll agreed that BNM would maintain its overnight policy rate at 3.00% on Sept. 5. An additional median from a smaller sample projected that rates would remain stable at the current level until at least 2026, which aligns with forecasts from the beginning of the year. In contrast to BNM, major central banks are expected to make rate reductions at least once in 2024.
According to Lavanya Venkateswaran, a senior economist at OCBC Bank, there is currently no necessity for BNM to modify the policy rate. This decision is based on the fact that economic growth is exceeding expectations, and inflationary pressures are minimal. Malaysia’s GDP grew by 5.9% last quarter, the fastest rate in 18 months, driven by robust consumer spending, exports, and investment. There are expectations for inflation to rise in the latter part of 2024 due to uncertainties related to a recent policy change involving diesel subsidies, making a rate cut in the near future unlikely.
Moorthy Krshnan, a senior economist at Pantheon Macroeconomics, highlighted the ongoing uncertainty surrounding the timing of further fuel subsidy adjustments. He suggested that the central bank is likely monitoring potential second-round effects from the previous removal of diesel fuel subsidies, making any immediate rate cuts premature. Despite potential inflation upticks following the diesel subsidy cuts in June, BNM has assured that inflation will remain manageable.
This year, the Malaysian ringgit has appreciated by approximately 6%, largely influenced by expectations of interest rate cuts by the Federal Reserve. The weakening of the U.S. dollar due to growing concerns about U.S. economic growth has further strengthened the ringgit. Given these circumstances, a rate cut by BNM at this juncture would be unnecessary and could potentially lead to increased inflation. Moorthy Krshnan also emphasized that the ringgit’s performance is significantly impacted by the weakening dollar trend, as the Fed prepares for rate cuts, allowing for a favorable interest rate differential that benefits the Malaysian currency.
The prevailing economic conditions in Malaysia, characterized by robust growth and contained inflation, suggest that Bank Negara Malaysia is likely to maintain its current interest rate levels through 2025. Despite global economic uncertainties and potential domestic challenges, the central bank’s cautious approach to monetary policy aims to balance economic expansion with price stability.