Bank Negara Malaysia in inflation ‘sweet spot’

Healthy economy, moderate inflation and a stronger ringgit underpin nation’s robust growth.

KUALA LUMPUR: Malaysia’s central bank is in a sweet spot. Economic growth is gaining momentum, inflation is moderating, and the ringgit is headed for its first annual gain in five years.

After four quarters of expansion that beat expectations, Governor Muhammad Ibrahim said in August that “when economic growth is entrenched, and if inflation is essentially benign, it gives Bank Negara a bit more flexibility in terms of policy”.

Inflation has eased every month since reaching an eight-year high in March.

All 21 economists surveyed by Bloomberg predict the overnight policy rate will be held at 3% on Thursday. A separate survey last month showed analysts were split on a rate increase by end-2018. Bank Negara Malaysia has left borrowing costs unchanged since a surprise reduction in July last year.

“There were some market talks on whether Bank Negara might actually consider raising interest rates” following strong second-quarter gross domestic product growth, said Julia Goh, an economist at United Overseas Bank Ltd in Kuala Lumpur.

“But in light of what’s happening in the region, the geopolitical risks, North Korea uncertainty, I think Bank Negara will keep the rate unchanged for now.”

Here are key points to watch:

Growth outlook

The economy has expanded faster than analysts predicted this year, helped by a global trade recovery that spurred exports as well as resilient domestic demand. The World Bank raised Malaysia’s growth forecast in June by the most in East Asia, projecting a 4.9% rate for 2017.

Inflation

Inflation spiked earlier this year due to higher fuel costs and reached 5.1% in March, the fastest pace since 2008. Price gains have since eased to 3.2% in July and are expected to average 3% to 4% this year.

Financial risks

While the central bank hasn’t seen signs of financial imbalances emerging, the level of household debt is one of the highest in the region and Malaysia needs to be particularly careful, Muhammad said in July. The household debt-to-GDP ratio was 88.4% in 2016 compared with 89.1% in 2015.

Meanwhile, the ringgit has gained more than 5% against the US dollar this year, heading for its first advance since 2012. -FMT