Malaysia central bank maintains 2.75% key interest rate amid economic headwinds

SINGAPORE (ICIS)–Malaysia’s central bank on Thursday unexpectedly kept its key benchmark interest rate unchanged amid expectations that the country’s 2023 economic growth will moderate this year amid a global slowdown.

• GDP growth in 2022 to exceed 6.5-7.0%
• 2023 inflation to stay elevated
• Exports growth to decelerate

Elevated cost pressures, high interest rates, and COVID-19-related disruptions in China have been weighing on overall economic activity.

Bank Negara Malaysia maintained its overnight policy rate (OPE) at 2.75% on Thursday, after hiking rates by a total of 100 basis points since May 2022.

“Today’s decision allows the monetary policy committee to assess the impact of the cumulative past overnight policy rate (OPR) adjustments, given the lag effects of monetary policy on the economy,” the central bank said in a statement.

Further adjustments to the bank’s monetary policy will depend on “evolving conditions and their implications to the domestic inflation and growth outlook”.

Malaysia’s full-year 2022 economic growth is now expected to exceed earlier estimates of 6.5%-7.0% as latest data showed continued expansion in the fourth quarter on the back of resilient domestic demand.

In 2021, the economy posted a 3.1% growth, a reversal of the 5.6% contraction in 2020.

“Downside risks to the domestic economy [in 2023] continue to stem from a weaker-than-expected global growth, higher risk aversion in global financial markets amid more aggressive monetary policy tightening in major economies, further escalation of geopolitical conflicts, and re-emergence of significant supply chain disruptions,” Bank Negara Malaysia said.

Malaysia’s headline and core inflation are expected to moderate in 2023 but would remain elevated amid lingering demand and cost pressures.

In January-November 2022, the average inflation stood at 3.4%, peaking in the third quarter.

“Existing price controls and fuel subsidies, and the remaining spare capacity in the economy, will continue to partly contain the extent of upward pressures to inflation,” Bank Negara said.

“The balance of risk to the inflation outlook is tilted to the upside and remains highly subject to any changes to domestic policy on subsidies and price controls, as well as global commodity price developments,” it added.

EXPORTS GROWTH SET TO MODERATE
Malaysia’s exports will continue its moderating growth momentum and likely to decelerate to 1.5% in 2023 from 25% in 2022, Singapore-based UOB Global Economics & Research said in a note on 18 January.

Imports last year, on the other hand, increased at a higher rate of 31.3% to a record Malaysian ringgit (M$) 1.3tr ($302bn), data from the Ministry of International Trade and Industry (MITI) showed.

Malaysia posted a 2022 trade surplus of M$255.1bn, the largest value on record, according to MITI.

The expected sharp slowdown in 2023 export growth “takes into consideration the statistical base effects (after two consecutive years of robust gain in 2021-2022), softening global demand, ongoing global tech down cycle, exporters’ capacity in meeting ESG [environmental, social, and governance] market demand, and expectations for lower export earnings in light of stabilizing commodity prices”, UOB said.

Potential spill-over effects from China’s re-opening and greater access to global markets following ratification of two multilateral trade agreements last year are seen as key contributors to Malaysia’s export growth outlook in 2023, it added.

Focus article by Nurluqman Suratman

($1 = M$4.31)

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