With growth set to slow, inflation benign and the currency continuing to strengthen, Malaysia’s central bank is likely to leave its rates unchanged for the rest of this year and next, Alex Holmes and Krystal Tan, economists at Capital Economics, said.
Bank Negara Malaysia decided to raise the overnight policy rate by 25 basis point to 3.25 percent, on January 25.
The bank lifted its key rate for the first time in more than three years as strong growth momentum is expected to continue this year.
The accompanying policy statement by the central bank left the door open to further hikes, stating that the committee decided to “normalise the degree of monetary accommodation” given that the economy was “firmly on a steady growth path”, economists observed.
“Looking ahead, however, there are good reasons to think that BNM won’t raise rates any further,” Capital Economics added.
First, growth looks set to slow, although investment should remain strong, supported by large Chinese-backed infrastructure projects.
Nonetheless, one of the key drivers of the economy last year, export growth, is set to slow in 2018.
Besides this, households’ high level of debt will constrain consumer spending and fiscal policy looks set to be tightened this year as the government aims to reduce the deficit to 2.8 percent of GDP from 3.0 percent last year.
The second important point is that inflation should remain low and stable in the coming moths.
Slowing growth should help to keep underlying price pressures under control.
“Third, further hikes could put further upward pressure on the ringgit,” Capital Economics pointed out.
The Malaysian ringgit is already up almost 14 percent against the US dollar since the start of last year, making it the top performer in Emerging Asia.
In short, there is little chance of an aggressive hiking cycle and we expect that rates will remain unchanged for the rest of this year and next, economists concluded.
The material has been provided by InstaForex Company – www.instaforex.com