MNI STATE OF PLAY: Malaysia Recovers, Watches Inflation

Malaysia’s economy looks set to rebound further from pandemic conditions and Bank Negara Malaysia is expected to come under pressure later in the year to change its outlook and begin to tighten even as it stays steady on Thursday.

BNM's Overnight Policy Rate is at a record low of 1.75% since the last cut in mid-2020. But the economy is expected to stage a strong recovery this year with growth forecast at between 5.5% and 6.5%, an upgrade on previous estimates.

Growth in the fourth quarter of 2021 rebounded 3.6% after a 4.5% fall in the third quarter as the pandemic disruptions closed activity down, see: MNI BRIEF: Malaysia's 2021 GDP Clocks 3.1%, Policy Stays Easy.

POSITIVE SIGNS

The closely watched Leading Index recently posted 2.1% year on year growth and is at its highest point since May 2021, and manufacturing and producer price indices have recently been encouraging.

But with wages growth gaining momentum and inflation at 3.2% over the year to December, BNM is expected to get ready for when the economy begins to heat up, and as the U.S. Fed begins to tighten in March.

BNM is understood to have a target range for inflation of between 1% and 3% and policy makers will be watching this closely to see if inflationary factors are transitory, or if continued price gains require a tighter policy response.

In the meantime, the central bank is likely to take the view that continued monetary support is required to drive the recovery.