Bank Negara Malaysia (BNM) is anticipated to maintain its key interest rate at 3.00% on Thursday, as indicated by a recent Reuters poll. The central bank is likely to sustain this rate steady until at least 2025 due to robust economic growth and controlled inflation. Despite inflation being at a manageable 2.0%, the Malaysian ringgit has experienced a shift from being one of the weakest Asian currencies to being among the strongest in recent weeks. This transformation implies that BNM is not in a hurry to reduce rates, as doing so could potentially weaken the currency and lead to imported inflation.
Economists’ Predictions
All 30 economists surveyed in the August 27th to September 2nd Reuters poll unanimously agreed that BNM would maintain its overnight policy rate at 3.00% on September 5th. A median estimate from a smaller sample suggested that rates would remain unchanged until at least 2026, a projection that has remained consistent since the beginning of the year. This forecast contrasts with expectations for major central banks, which are anticipated to lower rates at least once in 2024.
Lavanya Venkateswaran, senior ASEAN economist at OCBC Bank, highlighted that the current state of growth exceeding expectations and inflation remaining benign provides no compelling reason for BNM to alter the policy rate. Malaysia’s gross domestic product (GDP) expanded by 5.9% in the previous quarter, marking the quickest pace in 18 months. This growth was primarily propelled by vigorous household spending, robust exports, and increased investments. Additionally, the central bank is likely to abstain from a rate cut in the near future due to the anticipated rise in inflation during the second half of 2024, stemming from uncertainties related to recent policies aimed at reducing diesel subsidies.
Moorthy Krshnan, senior Asia economist at Pantheon Macroeconomics, indicated that the Bank Negara Malaysia is closely monitoring the effects of recent diesel subsidy reductions and potential second-round impacts. Consequently, initiating a rate cut at this juncture would be premature in light of the prevailing uncertainties. The Malaysian ringgit has appreciated by approximately 6% this year, partly influenced by expectations of interest rate cuts by the Federal Reserve, resulting in a weakened U.S. dollar. Given this scenario, an immediate rate cut by the central bank would be unwarranted and could potentially fuel inflation.
As the Federal Reserve contemplates interest rate reductions in response to growing concerns about U.S. economic growth, the Malaysian ringgit is anticipated to benefit from a weaker dollar. The narrowing interest rate differential between the two currencies is likely to work in favor of the ringgit. Despite inflation possibly edging higher following diesel subsidy cuts, the central bank foresees the situation as manageable. Therefore, maintaining the current interest rate appears to be a prudent course of action for Bank Negara Malaysia amid the prevailing economic environment.