By Stephanie Jacob
Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) has decided to maintain the overnight policy rate (OPR) at 3.25% following the conclusion of its first meeting for 2016.
The central bank noted that while the global economy continues to expand, the expected recovery among advanced economies has not been as strong as hoped for and growth in emerging markets has also slowed.
It said that going forward, financial volatility and uncertainty would continue to pose risks to global growth.
BNM said that domestic demand would remain the main driver of growth in the Malaysian economy.
“While private consumption has moderated as households adjust to the higher cost of living, household spending is being supported by continued growth in income and employment. Overall investment has benefitted from the implementation of infrastructure development projects and capital spending in the manufacturing and services sectors despite the lower investment in the oil and gas sector,” said BNM.
“The Malaysian economy is expected to see more moderate growth in 2016, after expanding by about 5% in 2015. The downside risks to growth have increased due to greater uncertainty on both the global and domestic fronts,” said BNM.
Nonetheless the economy will benefit from having diversified sources of growth, economic flexibility, low unemployment, manageable level of external debt, and a well-capitalised banking system and developed capital markets that provide continued access to financing, said the central bank.
Meanwhile, inflation is expected to trend higher in 2016 due to recent adjustments in administrative prices and the weaker ringgit exchange rate.
However, the impact of these domestic cost factors is expected to be mitigated by the continued low energy and commodity prices and the generally subdued global inflation. Headline inflation is anticipated to peak in the first quarter of 2016 and then moderate from there.
BNM noted that recent external and domestic developments have continued to affect the ringgit exchange rate and domestic financial markets. Adding that the nett external outflows have also led to a moderation in domestic liquidity.
However, the central bank said its monetary operations have ensured that there is sufficient liquidity to support the the money and foreign exchange markets.
“The financial system remains sound with financial institutions operating with ample liquidity buffers. Consequently, the growth of financing to the private sector continues to be healthy,” BNM said.
BNM also announced the decrease in the statutory reserve requirement (SRR) ratio from 4% to 3.5%, effective from Feb 1, 2016.
“The decision to reduce the SRR is undertaken as part of a comprehensive effort by Bank Negara Malaysia to ensure sufficient liquidity in the domestic financial system, and to support the orderly functioning of the domestic financial markets,” it said.
Since early 2015, BNM has relied on its monetary operations, including the reverse repo facility, to provide liquidity to the banking system as net external outflows reduced the amount of liquidity in the system. As at Jan 21, 2016, this has amounted to RM40 billion.
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