6th March 2014
Malaysia’s central bank maintained its Overnight Policy Rate (OPR) at 3.0 percent, as expected, and said inflation is expected to be affected by higher domestic costs and it would “continue to monitor for signs of destabilizing risk of financial imbalances.”
Bank Negara Malaysia’s (BNM) mention of the risk of financial imbalances signals its concern over inflation from an expanding economy and the impact of disruptions in supply from adverse weather and higher domestic costs from the government’s cut in fuel subsidies in September, higher utility tariffs in January and coming changes in taxes in April.
BNM has held its benchmark OPR rate steady since May 2011 but economists are expecting the central bank to start tightening later this year to stem inflation which rose to a higher-than-expectd 3.4 percent in January, continuing the acceleration seen since December 2012 when it was 1.2 percent.
The central bank has acknowledged the rise in inflation and expects it this year to top 2013’s average rate of 2.1 percent and has said it may exceed the long-term inflation average of 3.2 percent. However, subdued external price pressures and moderate domestic demand will also contain the impact of some of these cost pressures on inflation.
“For the Malaysian economy, latest indicators point to further improvement in exports and continued expansion in private sector investment spending. Going forward, this trend is expected to continue,” the central bank said.
Malaysia’s Gross Domestic Product rose by 2.1 percent in the fourth quarter from the third quarter for annual growth of 5.1 percent, up from 5.0 percent. Average growth in 2013 was 4.7 percent, down from 2012’s 5.6 percent, but the government expects growth this year of 5.0 percent to 5.5 percent.
Exports are expected to continue to benefit from the recovery in advanced economies and from regional demand while investment activity should remain robust on the back of private sector investment in manufacturing and services.
Domestic demand, however, is expected to moderate due to the consolidation of the public sector and the return of private consumption to its long-term average, the central bank said.
The central bank described the global economic expansion as “moderate” and while advanced economies are improving, it was still modest and uneven. Growth in Asia is also supported by a better external sector while domestic demand is moderating in some economies.
“Conditions in the international financial markets continue to be volatile as markets adjust to policy shifts in a number of major economies and to geopolitical developments,” BNM said.