BNM patient on rates to aid recovery

Current policy stance is ‘appropriate and accommodative’ and any adjustment will be datadependent, says governor 


BANK Negara Malaysia (BNM) signalled it’s not yet ready to withdraw policy support as the economy recovers, steering clear of the hawkish pivot undertaken by major central banks. 

The current policy stance is “appropriate and accommodative” and any adjustment will be data-dependent, governor Tan Sri Nor Shamsiah Mohd Yunus said in an email interview. 

Headline inflation is expected to remain moderate in 2022 and the economy likely achieved the official growth target of 3% to 4% last year, she added. 

“Going forward, the domestic economy is projected to gradually recover amid modest price pressures,” Shamsiah said. “Given the prevailing uncertainties surrounding the pandemic and supply chain disruptions, among others, the Monetary Policy Committee remains mindful of avoiding a premature withdrawal of policy support that could derail the economic recovery.” 

Malaysian policymakers are seeking to strike a balance between reining in quickening price pressures and reviving an economy that’s been hit by virus curbs. An accommodative stance risks narrowing the nation’s yield premium over the US and triggering capital outflows. 

Growth will improve further this year, thanks to better global demand, higher private sector spending and an easing of virus restrictions, Shamsiah says

Shamsiah said Malaysia’s policy stance is premised on the achievement of price stability and sustainable growth, signalling that the central bank may not move in lockstep with major peers such as the US Federal Reserve. 

“While we remain vigilant of the potential tightening in global financial conditions, this is not expected to significantly affect the overall transmission mechanism and degree of domestic monetary accommodation, given the more dominant role of domesticbased financing for the Malaysian economy.” 

Interest-rate swaps indicate that traders are pricing in about 60 basis points of hikes from the Malaysian authority over the next 12 months. BNM has held rates steady since July 2020 as it looks to cement a recovery that’s being threatened by a recent wave of flash floods and rising omicron cases. 

A report due on Feb 11 is forecast to show that the economy grew 3.1% in the December quarter from a year earlier, after contracting 4.5% in the previous three months. 

Growth will improve further this year, thanks to better global demand, higher private sector spending and an easing of virus restrictions, Shamsiah said, adding that the central bank will provide its latest assessment on the economy in March. Core inflation is expected to edge higher as the economy reopens and commodity prices remain elevated, she said. 

“Nevertheless, core inflation is expected to be modest, with the upward pressure contained by the continued slack in the economy and labour market,” Shamsiah said. 

Annual consumer price gains eased to 3.2% in December after touching a four-year high of 4.7% in April. 

On the ringgit’s performance, Shamsiah said the currency’s depreciation versus the dollar in 2021 was in line with the weakening of other major and regional currencies. 

“It is important the adjustments in the exchange rate continue to be determined by the market and in an orderly manner,” she said. “I want to stress that the bank conducts two-way foreign exchange intervention operations to manage excessive volatility and ensure sufficient liquidity and not to target the ringgit at any specific level.” 

Malaysia’s currency declined 3.5% last year in the biggest annual drop since 2016 as the greenback strengthened on bets for a withdrawal of US stimulus. The median forecast in a Bloomberg survey of analysts is for the ringgit to strengthen to 4.14 by year-end from around 4.18 now. 

Malaysia is also assessing the potential benefits of adopting a digital currency, as part of measures targeted at helping the country’s financial services sector capitalise on the new technologies. 

“We are going one step further by experimenting with central bank digital currencies over the next few years,” Shamsiah said in an email interview. “There’s no better way to keep pace with something new than to try it ourselves.” 

While the central bank aims to speed up the growth of financial technology, it will ensure that new systems face similar scrutiny and safeguards to manage risks, she said. 

This is an abridged transcript of the interview. 

Q: What are BNM’s aspirations for the domestic fintech sector? 

Like many central banks around the world, we are paying close attention to the digital asset space, and the opportunities and risks that come with it. As with any emerging development, our goal is to ensure that the way we regulate and supervise continues to serve our monetary and financial stability mandates. 

This is an exciting space, with many promising ideas and a lot going on. But I want to be clear that we don’t want to simply get caught up in all the hype and buzz. We do not promote technology for its own sake. It must deliver tangible benefits to the economy. 

Q: What are the drivers behind your plan for digital insurers and takaful operators? 

An important motivation for introducing digital players in insurance and takaful is to serve the objective of expanding coverage. Our insurance penetration is still low. Only 15% of SMEs (small and medium enterprises) have insurance or takaful cover, and 25% of lower-income working adults have some form of life insurance and family takaful cover. 

Digital insurers and takaful operators can play a role by introducing more innovative offerings that better serve these segments. New players will inject greater dynamism into the sector. We also want to see traditional players undertake digital transformation to remain relevant in the face of competition. 

Q: What measures are you planning to further develop the domestic bonds and currency markets? 

Since 2018, we have gradually liberalised foreign exchange policy to provide greater flexibility for businesses and investors to better manage their forex risk. This has helped strengthen Malaysia’s position as an FDI destination and role in the global supply chain, as well as to widen global investors’ access to the onshore market. 

Today, our bond market is included in major global indices. Global investors also have allocations to our market. Although global markets continued to be volatile, non-resident holdings of government bonds remained stable at around 25% throughout 2021. 

For 2022, we will continue to work with market participants through the Financial Market Committee to further develop our market, including areas such as the collateralised funding market and the sustainable financing space. — Bloomberg