Benign Inflation Allows BNM to Hold Rate

The central bank reaffirmed its commitment to bolster economic expansion amid stable inflation. BNM's outlook on inflation remains moderate for the year, supported by stable demand dynamics and controlled cost pressures. The projection of inflation ranging between 2-3.5% yr/yr for 2024, compared to 2.5% in the previous year, suggests confidence in the resilience of the economy amid policy changes such as the 2-percentage point hike in services tax and the restructuring of Employees Provident Fund accounts. However, BNM emphasised that the inflation forecast is contingent upon the implementation of the government's subsidy rationalisation plan, slated to roll out in the latter half of the year. The central bank anticipates core inflation to hover between 2-3% throughout 2024, indicating a balanced outlook on underlying price pressures.

Figure 1: Malaysia Main Policy Rate and Consumer Price Inflation (%)

Source: Continuum Economics

Economic activity is expected to gain momentum this year, propelled by robust household expenditure, a rebound in exports, and an increase in tourist arrivals. Although BNM refrained from providing a specific GDP growth forecast, recent data from the Department of Statistics Malaysia revealed a promising start to the year, with first-quarter GDP growth reaching a four-quarter high of 3.9%  yr/yr. Our expectation is that Malaysia's economy will benefit from an acceleration in exports, fuelled by the global tech surge and sustained robustness in non-electrical and electronic goods. However, downside risks stem from heightened geopolitical tensions globally, higher-than anticipated inflation outturns and global financial market volatility. 

Addressing concerns regarding the depreciation of the ringgit against the U.S. dollar, BNM reiterated its stance that the currency's value does not accurately reflect Malaysia's economic fundamentals and growth prospects. External factors such as evolving expectations regarding major economies' monetary policies and geopolitical tensions have contributed to volatility in capital flows and exchange rates. Despite the ringgit's recent weakness, BNM remains optimistic about its long-term prospects, anticipating appreciation driven by a narrowing interest rate differential with the U.S. BNM ruled out immediate adjustments to the policy rate to bolster the currency, reinforcing our view that a rate cut is unlikely this year. Given the expectation of delayed rate cuts by the Federal Reserve, we now expect BNM to hold rate throughout 2024 (as opposed to our earlier forecast of a 10bps rate cut in end-2024). The main policy rate is expected to be 3% till at-least mid-2025.