Malaysia Holds Key Rate, Weighing Risks From Subsidy Cuts

(Bank Negara Malaysia)

(Bloomberg) -- Malaysia’s central bank kept its benchmark interest rate unchanged on Thursday, giving itself room to gauge the impact of potential price hikes as the government unwinds blanket fuel subsidies.

Bank Negara Malaysia left the overnight policy rate at 3%, as seen by all economists in a Bloomberg survey. The central bank has held borrowing costs steady since a rate hike in May 2023, which ended 125 basis points of interest-rate increases over a one-year period.

The decision gives BNM scope to act should subsidy reforms stoke price pressures. While inflation remains subdued, that could change after Malaysia allowed diesel prices to jump 56% last month as it shifted toward targeted assistance. The government plans to do the same for RON95 gasoline — Malaysia’s most-widely used fuel — to meet Prime Minister Anwar Ibrahim’s target of narrowing the budget deficit below 5% of gross domestic product.

“As expected, inflation will trend higher in the second half of 2024, amid the recent rationalisation of diesel subsidies,” the central bank said in the statement. Policymakers assess price gains from the government’s move to be manageable, upside risk will depend on “spillover effects of further domestic policy measures on subsidies and price controls to broader price trends.”

The higher inflation will be largely cost-push, according to Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore. “Though we will watch for signs of build-up in demand-pulled drivers” from investment growth and pipeline measures such as wage increases for civil servants, he said.

The central bank forecasts headline annual inflation at 2%-3.5% for 2024, unchanged from its May 9 meeting when BNM signaled the outlook depends on the implementation of the subsidy reform. June inflation — which would reflect the impact of higher diesel prices — will only be available later this month.

Monetary policy remains supportive of the economy, the central bank reiterated on Thursday. The latest indicators point to sustained strength in economic activity in the second quarter of 2024, driven by resilient domestic consumption and better export performance seen to benefit from the global tech upcycle. Tourism and investment are counted on to provide support, BNM said.

What Bloomberg Economics Says...

Bank Negara Malaysia appears comfortable with its policy setting — in no rush to adjust rates — either way. With policy at what appears to be at the neutral level — supporting growth without adding to price pressures — we still expect BNM to leave its policy rate unchanged through 2024.

—Tamara Mast Henderson, Asean economist

For the full note, click here

The ringgit held its gains after the decision, climbing 0.2% against the dollar. The currency has stabilized from a 26-year low reached in February and was among the few in Asia that didn’t weaken last quarter. The ringgit continues to be driven primarily be external factors, and reforms will provide more enduring support to the currency over the medium term, the central bank said.

“BNM’s tone remained sanguine around global growth prospects, with its assessment of the Malaysian economy broadly similar to its previous meeting on 9 May,” said Lavanya Venkateswaran an economist at Oversea-Chinese Banking Corp. in Singapore. “We continue to forecast no changes to the policy rate from BNM for the remainder of this year.”

--With assistance from Marcus Wong, Joy Lee, Ram Anand, Cecilia Yap and Shinjini Datta.

(Updates with details throughout.)

©2024 Bloomberg L.P.

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