BNM keeps OPR at 3.25% as EM currencies slide

Policy and supply uncertainties at home forces BNM to refrain from interest-rate hike

By NG MIN SHEN / Pic By TMR File

Malaysia’s central bank has maintained the Overnight Policy Rate (OPR) at 3.25% as rising risk of global trade tensions would dent economic growth.

Policy and supply uncertainties at home had forced Bank Negara Malaysia (BNM) to retain the interest rate to keep the economy moving.

“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,” the central bank said in a statement yesterday.

MIDF Research said the world output was dragged by 0.71% due to the US-China trade war.

“Based on our estimate, world GDP growth will reduce by 0.71% if demand by the US on Chinese goods and services drops by 1%. In the same note, China’s economy will shrink by 0.72%,” said the research house. MIDF said for every 1% drop in the US demand, Malaysia’s output will reduce by 0.86%.

Worries intensified over the negat ive impact of the Washington-Beijing tariff barbs, especially among the emerging markets (EMs).

The Indonesia rupiah dropped to record low of 14,933 against the greenback yesterday. The rate was lower compared to during the 1998 Asian financial crisis.

Indonesia’s central bank also intervened in the market to stabilise the rupiah. The country’s central bank had raised interest rates, the fourth hike since May this year. Indonesia had also imposed higher import duties and curbs to prevent further outflow of its currency.

Meanwhile, the BNM’s announcement did not help raise the ringgit as the local unit slump to RM4.147 yesterday. The ringgit had lost 2.42% of its value this year.

Signs of slower momentum are showing in global economic expansion as risks to growth have increased, BNM warned.

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.

“In line with regional economies, the domestic financial markets continue to experience non-resident portfolio outflows due to ongoing global developments.

Despite these adjustments, domestic financial markets remain resilient with domestic monetary and financial conditions supportive of economic growth,” the central monetary authority said.

Meanwhile, headline inflation, which stood at 0.9% in July 2018, is expected to rise due to policy measures.

“The impact of the changes in the consumption tax policy on headline inflation will be transitory and lapse towards the end of 2019. Underlying inf lation is nevertheless expected to remain relatively stable,” the central bank said.

“At the current level of the OPR, the degree of monetary accommodativeness is consistent with the intended policy stance. The Monetary Policy Committee will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation,” BNM stated.

The OPR was last hiked on Jan 25 to 3.25% from 3%, the first raise since 2014 in light of global and domestic economic conditions being ripe for a normalisation of interest rates, as well as to curb risks arising from long periods of low interest rates.

Prior to the hike, BNM’s last move was to cut the OPR to 3% from 3.25% in July 2016, a step aimed at protecting the country from global headwinds including the UK’s vote in 2016 to exit the European Union.