As per the forecasts by economists, Bank Negara Malaysia (BNM) is anticipated to maintain its key interest rate at the current level of 3.00% through 2025. The decision to keep the interest rate stable reflects the country’s robust economic growth and manageable inflation rate. Despite inflation hovering around 2.0%, the Malaysian ringgit has shown significant strength, shifting from one of the weakest Asian currencies to one of the strongest recently. This evolution indicates that the central bank is unlikely to reduce rates in the near future to prevent currency depreciation and potential inflationary pressures.
Malaysia’s economy exhibited a strong performance in the last quarter, with a growth rate of 5.9%, marking the fastest pace in 18 months. This growth was primarily driven by robust household spending, solid exports, and increased investments. The positive growth trajectory, coupled with benign inflation levels, presents a compelling case for maintaining the current interest rate. While there are expectations of inflation edging higher in the second half of 2024 due to uncertainties surrounding the reduction of diesel subsidies, experts believe that a rate cut is improbable in the coming months.
Industry experts argue that there is no immediate necessity for BNM to alter the policy rate given the favorable economic conditions in Malaysia. Lavanya Venkateswaran, a senior ASEAN economist at OCBC Bank, highlights that the current growth momentum and well-contained inflation levels do not warrant a change in the interest rate. Moreover, the central bank’s vigilance regarding the implications of reducing fuel subsidies on inflation underscores the cautious approach towards any potential rate adjustments.
Moorthy Krshnan, a senior Asia economist at Pantheon Macroeconomics, emphasizes the importance of monitoring the ripple effects of previous policy decisions on diesel subsidies before contemplating a rate cut. The central bank’s commitment to ensuring manageable inflation despite potential inflationary pressures from subsidy reductions indicates a stance towards maintaining interest rate stability. The recent appreciation of the Malaysian ringgit against the U.S. dollar by approximately 6% further underlines the need for prudent monetary policy decisions to avert inflation.
The expectations of the Federal Reserve considering interest rate cuts have contributed to a weaker U.S. dollar, subsequently strengthening the Malaysian ringgit. As the interest rate differentials narrow between the two countries, the ringgit benefits from a positive outlook. With the potential for lower interest rates in the U.S., the importance of stability in Malaysia’s interest rates becomes more pronounced to prevent inflationary pressures and preserve economic growth.
Bank Negara Malaysia’s decision to maintain the key interest rate at 3.00% showcases a commitment to sustaining economic growth and managing inflation effectively. The favorable economic conditions, coupled with prudent policy measures, lay the groundwork for a stable and resilient Malaysian economy. Amid uncertainties in the global economic landscape, Malaysia’s cautious approach towards monetary policy provides a sense of continuity and confidence in the future outlook of the nation’s economy.