BNM seen holding key rate on easing inflation, steady growth

BNM seen holding key rate on easing inflation, steady growth

KUALA LUMPUR,. Malaysia’s central bank is expected to leave its benchmark interest rate unchanged at a meeting on Wednesday, as growth remains firm and a short-term dip in inflation is expected after the new government removed a much-maligned consumption tax.

All 10 economists polled by Reuters forecast that Bank Negara Malaysia (BNM) will hold its overnight policy rate at 3.25 per cent.

Unlike Indonesia and the Philippines, Malaysia has hiked its policy rate just once this year, by 25 basis points in January. That increase was the only hike since July 2014.

Wednesday’s meeting will be the second since May 9 elections brought a stunning change of government and the return of Mahathir Mohamad, premier from 1981 to 2003, as prime minister.

It will be the first BNM policy meeting with Nor Shamsiah Mohd Yunus as governor. She assumed the post on July 1.

Soon after taking office, Mahathir scrapped the 6 per cent goods and services tax imposed in 2015, which Malaysians said was a major contributor to rising living costs and a key reason to reject Datuk Seri Najib Razak and his long-ruling coalition.

Scrapping GST will likely bring a significant fall in inflation rate, expected to average around 1 per cent in 2018’s second half, Capital Economics said in a note.

As a result, it said, “another rate hike is probably off the table”.

In May, BNM said scrapping GST would impact inflation, but it was too early to say by how much. It projected 2018 full-year headline inflation at 2-3 per cent.

May’s annual inflation rate was 1.8 per cent.

Standard Chartered, in a note on Friday, said external pressure may push the central bank to hike its key rate, should it become a drag on the ringgit currency, though it did not say when this could happen.

The ringgit traded at 4.033 to the dollar at midday today. It has weakened about 4.50 per cent since April 2, a peak for the year.

StanChart has maintained its 2018 full-year economic growth projection at 5.3 per cent, saying the pace would “moderate from strong levels in 2017, but remain firm”.

Prior to the election, BNM forecast 2018 growth at 5.5-6.0 per cent, and has not made a fresh projection since the voting. The government reported 2017 growth at 5.9 per cent.

— Reuters