MNI STATE OF PLAY: Malaysia's BN Eyes H2 "Measured" Tightening

Malaysia’s central bank has the benefit of a benign domestic outlook, but external factors could prompt a tightening of monetary policy in the second half of the year.

Bank Negara Malaysia’s Monetary Policy Committee meets on Wednesday and while any change to the Overnight Policy Rate is considered unlikely, the bank has conceded that continuing accommodative policy at these levels creates risks for financial stability, See: MNI STATE OF PLAY: Malaysia Cites Ukraine In Steady Rates Call.

BNM Governor Nor Shamsiah Mohamad Yunus has said it is “mindful” of the consequences of an extended period of low rates, saying it could “lead to an unhealthy build-up in financial imbalances.”

Any monetary adjustment would be “gradual and measured.” The benchmark rate has been held at 1.75% since July 2020, just as the pandemic prompted the first lockdowns.

GROWTH UNDERWAY

Malaysia’s economy has since returned to growth and while inflation was above the central bank’s 2% to 3% target range earlier in the year it has since come back and printed at 2.2% in March although food inflation was at 4%.

The economy is also expected to be a net beneficiary from rising commodity prices, with Malaysia a significant exporter of natural gas and palm oil. The governor recently said that exporters would improve by 10.9% this year.

The global uncertainty from Ukraine has trimmed growth forecasts, however, with BNM now forecasting 2022 growth at 5.3% to 6.3% against the previous estimate of 5.5% to 6.55%. First quarter GDP data will be released on Friday this week.

Rising interest rates prompted by rate hikes from developed world central banks are also impacting on the ringgit, which has come under pressure along with most other regional currencies. The unit is around 4.38 to the USD against 4.18 at the beginning of the year.