Economy

Malaysia’s Central Bank to Maintain Rates at 3.0% Until at Least 2026, According to Reuters Poll

By Pranoy Krishna

BENGALURU – Bank Negara Malaysia (BNM) is expected to maintain its key interest rate at 3.00% during its upcoming meeting, with projections indicating that this rate will remain unchanged at least until 2025. This decision comes amid strong economic growth and controlled inflation, as reflected in a recent poll of economists.

Currently, BNM is successfully keeping inflation around 2.0%. Additionally, the Malaysian ringgit has made a significant recovery, shifting from being one of the weaker currencies in Asia to one of the stronger ones in recent weeks. This trend suggests that the central bank is unlikely to reduce rates soon, as it seeks to prevent any adverse impact on the currency that could lead to imported inflation.

In the Reuters poll conducted from August 27 to September 2, all 30 economists anticipated BNM would hold the overnight policy rate steady. A deeper analysis of a smaller subset of predictions indicated that rates are likely to remain at this level until at least 2026, a consensus that has not altered since the start of the year. This stance contrasts with expectations for rate cuts among several major central banks in 2024.

"There is no pressing need for BNM to adjust the policy rate right now… growth is outperforming expectations and inflation has been surprisingly stable," commented Lavanya Venkateswaran, a senior economist at OCBC Bank.

Malaysia’s gross domestic product grew by 5.9% in the last quarter, marking the fastest growth in 18 months, largely fueled by robust household spending, exports, and investment. While inflation is predicted to rise in the latter half of 2024, particularly due to uncertainties surrounding recent changes to diesel subsidies, the likelihood of a central bank rate cut appears low in the coming months.

Moorthy Krshnan, a senior economist at Pantheon Macroeconomics, noted the uncertainty around the timing of further adjustments to fuel subsidies and suggested that any potential rate cut would be premature given the current economic context.

The central bank maintains that inflation will remain manageable, even with potential increases following the reduction of diesel subsidies enacted in June.

The Malaysian ringgit has strengthened by approximately 6% this year, influenced in part by anticipations that the Federal Reserve may lower interest rates soon, which has contributed to a weakening of the U.S. dollar. This further supports the notion that a rate cut by BNM is not warranted and could lead to inflationary pressures.

Krshnan highlighted that the primary driver for the ringgit’s positive performance has been the narrative surrounding a weaker dollar, exacerbated by concerns regarding U.S. economic growth. With indications that the Fed may make cuts, the narrowing interest differential is expected to favor the ringgit’s stability.

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