BANK Negara Malaysia (BNM) has maintained its overnight policy rate at 3% after its Monetary Policy Committee (MPC) meeting today.

“At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity,” the central bank said in a statement.

“The MPC will continue to assess the balance of risks to domestic growth and inflation, to ensure that the monetary policy stance remains conducive to sustainable growth amid price stability.”

The central bank slashed the OPR by 0.25% in May.

It said the year-on-year growth of the Malaysian economy in the first quarter, which was anchored by domestic and external factors, was within expectations.

Going forward, domestic demand is expected to be the engine for growth, as the external sector’s performance is likely to be weighed down by slower global growth and trade tensions.

Stable labour market conditions and capacity expansion in key sectors such as manufacturing and services will continue to spur household and capital spending.

On that note, BNM said it is maintaining its baseline projection within the range of 4.3%-4.8%. 

“This projection, however, is subject to downside risks from ongoing uncertainties in the global and domestic environment, worsening trade tensions and extended weakness in commodity-related sectors.

“The global economy continues to expand moderately. Labour conditions in the advanced economies remain firm, while domestic demand continues to support growth in Asia. Leading indicators, however, point to a softening of the near term global economic outlook, with considerable downside risks remaining primarily from prolonged trade tensions. “

It added that while global financial conditions have eased with prospects of monetary easing in major economies, heightened policy uncertainty could lead to excessive financial market volatility.  

Coming back to the domestic front, headline inflation, which has remained low in the recent period, is projected to rise in the coming months as the impact of the changes in consumption tax policy lapses.

However, average headline inflation is expected to be broadly stable in 2019, as compared to the previous year. 

The trajectory of headline inflation will depend on global oil prices and policy measures such as the timing of the lifting of the price ceiling on domestic retail fuel prices. 

Meanwhile, underlying inflation is expected to remain stable, on the back of continued expansion in economic activity and in the absence of strong demand pressures.

Research houses expects OPR to be maintained for the rest of the year

Meanwhile, MIDF Research said it expects the OPR to be maintained at 3% for the remainder of the year as the 25 basis point rate cut in May is sufficient to boost economic growth, especially in terms of domestic demand.

The research house said as long as GDP growth remains above 4% and core consumer price index (CPI) is positive, no further changes to monetary stance is required.

It said the US Federal Reserve has signaled a possible interest rate cut at least once this year.

“Since there will be less pressure from both domestic and external fronts, we anticipate that Bank Negara will maintain the OPR at 3% rest of 2019.”

Meanwhile, OCBC Bank’s economist Alan Lau said in a research note that while the OPR is expected to be maintained for the rest of the year, a possible rate cut cannot be ruled out if  growth risk worsens.

Global uncertainties and weakness in the commodity sector can be seen as potential risk factors.

“We probably may still have to wait further down the road before we get an idea on how much such risks have worsened given the current trade truce between the US and China.”

Lau said the restart of the East Coast Rail Link project could be a potential boost to economic growth, which the central bank projected to range between 4.3% and 4.5%.

On inflation, he said it remains as “no constraint to monetary policy decisions.”

“Our own expectation is that headline may probably average around 1% for the entire 2019.” – July 9, 2019.