‘BANK NEGARA CAN BE MORE DOVISH’
New governor expected to keep key rate on hold as ringgit strengthens against US dollar and inflation stays low
NEW Bank Negara Malaysia governor presides over her first interest-rate meeting in a better position than most of her peers in Southeast Asia.
Unlike her counterparts in Indonesia and the Philippines — who are ramping up rate hikes to defend their currencies — Datuk Nor Shamsiah Mohd Yunus doesn’t have to do anything for now.
Even in Thailand, where rates have been on hold for more than three years and inflation is low, officials are discussing policy normalisation following the baht’s slump in the past three months.
In Malaysia, the ringgit has fared better than its peers amid an emerging market sell-off, in part because higher oil prices have bolstered inflows and strengthened the current-account surplus. The scrapping of a consumption tax also means inflation will probably remain low, enabling Shamsiah to dial back some of the hawkishness of her predecessor, who hiked rates in January.
“The hawkish bias in the monetary policy committee is going to definitely come off, which has been there for the last six months,” said Rahul Bajoria, a senior economist at Barclays Plc in Singapore. While the tone may be tempered, that “doesn’t mean that the central bank is going to be ready to cut rates right now”, he said.
All 18 economists surveyed by Bloomberg predict Bank Negara will hold its benchmark Overnight Policy Rate at 3.25 per cent today.
Traders have pared back expectations of future rate hikes, with the market implied policy rate for one year’s time declining to 3.26 per cent from 3.41 per cent in May, data compiled by Bloomberg show.
Shamsiah took over the helm at the central bank earlier this month under the new government of Prime Minister Tun Dr Mahathir Mohamad. She’s no stranger to central bank watchers, having previously been at the institution for three decades, and serving as a deputy to former governor Tan Sri Zeti Akhtar Aziz.
With economic policy still in flux, Shamsiah will be seeking to support growth by keeping rates on hold. The government is reviewing spending projects — including a high-speed rail to Singapore and two energy pipeline developments led by Chinese builders — to help bring down debt and liabilities from RM1 trillion.
On top of that, a trade war between the United States and China, Malaysia’s biggest trade partners, threatens the outlook for the export-reliant nation. For now, growth forecasts remain solid at more than five per cent for this year.
“The economy is re-balancing, so there could be some slowdown in some sectors, which is inevitable,” said Rosnani Rasul, an economist at Public Bank Bhd. If an interest-rate increase means “you’re going to choke growth, a cut meaning you need to support growth, I’m biased towards a cut, not a raise”, she said.
Shamsiah replaced Tan Sri Muhammad Ibrahim, who quit after questions were raised about the central bank’s role in a land purchase deal linked to 1Malaysia Development Bhd.
The ringgit is up 0.5 per cent against the US dollar this year, compared with a 6.5 per cent slump in the Philippine peso and a 5.3 per cent decline in rupiah. The local currency rose 0.3 per cent to 4.0280 against the greenback on Monday.
With little inflation pressure in the economy, Shamsiah has scope to keep policy on hold. Australia & New Zealand Banking Group Ltd (ANZ) cut its inflation forecast for Malaysia for this year to 0.7 per cent from 2.7 per cent. Consumer-price growth has been below two per cent since February.
“Inflation has turned out to be a lot more benign than what Bank Negara had predicted,” said ANZ economist Sanjay Mathur. “There’s absolutely no need for Bank Negara to do anything through the remainder of the year at least.”