Malaysia’s central bank, Bank Negara Malaysia (BNM), is expected to maintain its key interest rate at 3.00% on July 6 and keep it unchanged for the remainder of the year, according to a Reuters poll. This decision comes as inflation has shown signs of cooling, with headline inflation dropping to its lowest in a year at 2.8% in May. Although core inflation, which excludes volatile items, moderated slightly to 3.5%, it suggests that the central bank will hold its key rate higher for a longer period.
Out of the 25 economists polled, 22 predicted that BNM would maintain the policy rate steady at 3.00%, while the remaining three expect a 25 basis-point hike to 3.25%. The surprise 25 basis-point hike in May marked the end of the tightening cycle, and a slower trajectory of growth and retreating inflation is likely to prompt BNM to keep rates unchanged for the rest of 2023.
The median forecast suggests that rates will remain at 3.00% until the end of 2023, and no one predicts a rate cut this year. This aligns BNM with its regional peers who have already concluded their tightening cycles. While central banks like the U.S. Federal Reserve, the European Central Bank, and the Bank of England plan to raise rates to control inflation, the ringgit has depreciated nearly 6% against the dollar this year, more than its Southeast Asian counterparts.
The weaker currency, coupled with higher inflation resulting from expensive imports, may limit BNM from cutting rates in the near future. Gareth Leather, senior Asia economist at Capital Economics, highlighted that while most central banks in the region are expected to reduce rates over the next year, BNM will likely stay on the sidelines.
In conclusion, Malaysia’s central bank is projected to hold its key interest rate at 3.00% throughout 2023 in response to easing inflation. This decision is aligned with its regional peers and comes as the ringgit depreciates against the dollar. With a slower growth trajectory and retreating inflation, the central bank is expected to maintain its current stance for the remainder of the year.
