PETALING JAYA: Bank Negara Malaysia (BNM) will likely keep the overnight policy rate (OPR) at 3% for the rest of the year, according to economists.
They also agree that yesterday’s decision to maintain the rate is the right move given current economic conditions at both the domestic and global levels.
They are of the view that keeping the OPR steady is in the best interest of the country at a time when there is uncertainty in the global economy, making an expansion in domestic demand key to economic growth.
Bank Muamalat chief economist Afzanizam Rashid said BNM has to ensure that its policy rates remain positive at a time when the global economy, particularly in China, is slowing down.
Malaysia is an open economy with respect to trade and investment, making it imperative that BNM remains alert to the possibility of an incoming slowdown, he told FMT Business.
Afzanizam said that by BNM’s assessment, the global economy “seems to be tilting towards the downside”.
China, the world’s second largest economy, is struggling to address the weaknesses in its real estate market. In response, the People’s Bank of China (PBOC) cut interest rates recently to spur a recovery.
On Aug 21, the PBOC reduced its one-year loan prime rate to 3.45% from 3.55%. This was the second reduction in three months. It cut its rate from 3.65% in June.
Sunway Business School professor of economics Yeah Kim Leng said the pause was “appropriate” and in line with expectations given that inflation has eased and growth is moderating.
“BNM’s policy stance has now turned neutral and that could put the central bank in a comfortable position to monitor potential changes in the growth and inflation trajectory,” he told FMT Business.
Center for Market Education CEO Carmelo Ferlito also gave the thumbs up for BNM’s decision to maintain the OPR at 3%.
In any case, he said, the decision was expected “as we are not experiencing peculiar tension from the price side, and neither any hard decline in the economy”.
“It is not only expected, but most probably the right decision given the current economic conditions, and any different option would have been particularly neutral on the economy,” Ferlito added.
Professor of economics at Malaysia University of Science and Technology Geoffrey Williams and Afzanizam also expect the OPR to remain at the same level at least until the end of the year.
BNM’s monetary policy committee, which makes recommendations on interest rates, meets for the last time this year in November.
Williams, who also gave the BNM decision his stamp of approval, said no further changes is expected this year.
“Inflation is falling but growth is supported by domestic demand against difficult international headwinds, hence keeping rates on hold eases any pressure on domestic conditions and protects against international conditions,” Williams told FMT Business.
“Even though oil prices have risen, that will not affect inflation immediately and the weaker exchange rate is not affected much by interest rates. So these factors are not high priorities,” he concluded.
Yeah said BNM’s decision shows that it remains upbeat on the projected growth for this year, subject to increased risk coming from China.
“Given these changes, we need to monitor more closely in terms of growth because of the weaker-than-expected growth in China which is still coping with its financial, and real estate challenges, amongst others,” he said.
When announcing its decision to hold the OPR at 3%, BNM said that at the current level, the monetary policy stance remains supportive of the economy and is consistent with the current assessment of the inflation and growth prospects.
“The MPC will ensure that the monetary policy stance remains conducive to sustainable economic growth amid price stability,” it added.