Bank Negara holds key rate, says trade tensions main downside risk
PETALING JAYA: Bank Negara Malaysia (BNM) maintained the Overnight Policy Rate (OPR) at 3.25% at its Monetary Policy Committee (MPC) meeting yesterday, citing trade tensions as a key source of downside risk.
“Greater volatility in the international financial markets and monetary policy normalisation in the advanced economies could lead to further capital outflows and financial market adjustments in emerging economies,” the central bank said in a statement.
Despite persistent nonresident portfolio outflows due to ongoing global developments, BNM stressed that the domestic financial markets remain resilient with domestic monetary and financial conditions supportive of economic growth.
“The financial sector remains sound, with financial institutions continuing to operate with strong capital and liquidity buffers. In addition, the domestic economy maintains its underlying fundamental strength, with steady economic growth, low unemployment and current account surplus of the balance of payments.”
BNM said its monetary operations will continue to ensure sufficient liquidity to support the orderly functioning of money and foreign exchange markets and intermediation activity.
“At the current level of the OPR, the degree of monetary accommodativeness is consistent with the intended policy stance. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.”
Commenting on the domestic economy, BNM said supply disruptions in the mining and agriculture sectors led to more moderate growth in the second quarter of 2018, but on the demand side, growth remained supported by private sector activity with further impetus from net exports.
“Looking ahead, private consumption, which was boosted by the tax holiday, will continue to be driven by steady wage and employment growth. Investment activity is projected to be underpinned by continued capacity expansion in key sectors, particularly in the export- oriented industries, driven by favourable demand and efforts to enhance automation.”
However, it opined that public sector spending will weigh on growth as the government embarks on reprioritisation of expenditure.
The central bank said the external sector will continue to benefit from the sustained global growth momentum, but in the immediate term, the economy faces downside risks stemming from heightened trade tensions, prolonged weakness in the mining and agriculture sectors and some domestic policy uncertainty.
“On balance, the Malaysian economy is expected to remain on a steady growth path.”
Going forward and continuing into 2019, BNM expects headline inflation to edge upwards taking into consideration the impact of policy measures on domestic cost factors.
“The impact of the changes in the consumption tax policy on headline inflation will be transitory and lapse towards the end of 2019. Underlying inflation is nevertheless expected to remain relatively stable.”