BNM maintains interest rate but warns of global growth slowdown

According to the central bank, domestic demand will remain the key driver of growth in 2019


Bank Negara Malaysia (BNM) has kept the benchmark interest rate unchanged at 3.25% as the country confronts the prospect of a global economic slowdown, triggered by trade wars and extreme protectionism between economic giants.

The central bank, which last raised the Overnight Policy Rate (OPR) by 25 basis points a year ago, said the move would spur the domestic demand, a key driver of the economy, as the government continues to consolidate its fiscal position.

“For 2019, domestic demand will remain the key driver of growth. Private consumption will continue to be underpinned by stable employment and wage growth, while private investment will be supported by ongoing multi-year projects in both export- and domestic-oriented industries,” BNM said in a statement.

The central bank expects the private sector activity’s sustained growth would be able to offset the lower public spending.

Putrajaya is seeking to manage its spending and reconcile its fiscal position, battered from the RM1 trillion debt, which was also contributed from government guarantees and off the books borrowings.

The government also wants to reduce the fiscal deficit which would impact spending, especially for publicfunded infrastructure projects.

But the central bank warned of the moderating global growth with the increasing risk of tilting largely due to the escalation of the US-China trade tensions and commodity-related shocks.

“Global growth momentum is moderating with slower growth in the major economies. Trade tensions are beginning to have a material impact on global trade and investments,” the central monetary authority said.

The cold economic war between Washington and Beijing had already dragged global growth and trades.

China posted the lowest economic growth in 28 years last year as the impact of the trade wars with the world’s largest economy started to dent exports.

China is Malaysia’s largest trading partner. A slowdown in China’s economic growth will stutter Malaysia’s growth. Analysts have predicted an extreme trade war between the world’s two largest economies will hive off about 1.5% of Malaysia’s growth.

BNM also highlighted that growth prospects could be further weighed down by tightening financial conditions, heightened volatility in financial markets, political and policy uncertainties, and elevated debt levels.

Headline inflation for Malaysia, which averaged at 1% in 2018, is expected to trend moderately higher this year.

“The impact of the consumption tax policy on headline inflation in 2019 will start to lapse towards the end of the year. However, the trajectory of headline inflation will be dependent on global oil prices,” BNM said.

Meanwhile, underlying inflation is expected to remain contained in the absence of strong demand pressures.

The central bank said domestic financial markets remain resilient despite volatility caused by global developments, while the domestic economy maintains its underlying fundamental strength with steady economic growth, low unemployment and surplus in the current account of the balance of payments.

BNM’s monetary operations will continue to ensure sufficient liquidity to support the orderly functioning of money and foreign-exchange markets and intermediation activity.

“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,” the central bank said.

The OPR was last hiked on Jan 25, 2018, 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 Brexit.