KUALA LUMPUR, 3 May 2023:
Bank Negara Malaysia (BNM) today raised its policy rate by 25 basis points to 3%, “surprising consensus and our expectations for it to stay on hold,” said OCBC Bank Malaysia chief economist Selena Ling.
“The recent mix of weakening external data and easing inflation had suggested to us that BNM would not be inclined to hike further.
However, the justification for the hike came from BNM’s assessment of “further expansion in economic activity in the first quarter of 2023 after the strong performance in 2022” driven mainly by resilient domestic demand.
While BNM stated that the “risks to the domestic growth outlook are relatively balanced”, it included “stronger-than-expected tourism activity” as an additional upside risk to growth compared to its 9 March statement which only stated the “implementation of projects including those from the re-tabled Budget 2023” as the main upside risk.
Consequently, BNM assessed that “core inflation will remain at elevated levels amid firm demand conditions.”
BNM maintained from its previous meeting that “the balance of risk to the inflation outlook is tilted to the upside and remains highly subject to any changes to domestic policy including on subsidies and price controls, financial market developments, as well as global commodity prices.”
“The above assessment is consistent with our view in that domestic demand remains resilient; we expect 1Q GDP growth to remain strong at 5.1% year-on-year from 7% in 4Q. As a result, we also expect core inflation to ease at a slower pace than headline inflation.
“Looking ahead, we expect BNM to remain on hold for the rest of 2023. With this decision, BNM declared that it has ‘withdrawn the monetary stimulus intended to address the Covid19 crisis in promoting economic recovery’.
“That said, BNM has not closed the door on further tightening citing ‘the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances’.
At any rate, with BNM assessing that “at the current level, the monetary policy stance is slightly accommodative and remains supportive of the economy” it has signalled that looser monetary policy conditions are not on the cards for now.