Recent data suggests that Bank Negara Malaysia (BNM) is likely to keep its key interest rate steady as the country’s economic growth remains robust and inflation is under control. Despite the current inflation rate of 2.0%, BNM has successfully kept it in check. Additionally, the Malaysian ringgit has shown signs of strength, transitioning from one of the weakest performing currencies in Asia to one of the strongest in recent weeks. This indicates that the central bank is not in a hurry to implement rate cuts to avoid weakening the currency and causing inflation.
A recent poll conducted by Reuters involving 30 economists from August 27 to September 2 revealed that all experts expect BNM to maintain its overnight policy rate at 3.00% on September 5. Furthermore, a median projection from a smaller sample indicated that interest rates will likely remain stable until at least 2026. This outlook has remained consistent since the beginning of the year, contrasting with expectations of rate cuts from major central banks by 2024.
Analysts suggest that the current economic landscape provides no justification for BNM to adjust its policy rate, as economic growth is exceeding expectations and inflation is well-contained. Malaysia’s gross domestic product (GDP) expanded by 5.9% in the last quarter, the fastest pace in 18 months, driven by robust household spending, exports, and investment. Looking ahead, inflation is projected to rise in the latter half of 2024 due to uncertainties related to a recent policy change regarding diesel subsidies. This factor implies that a rate cut from the central bank is unlikely in the near future.
The central bank has emphasized that inflation will remain manageable despite potential increases following the reduction of diesel subsidies earlier in the year. Moreover, the Malaysian ringgit has strengthened by approximately 6% in 2024, largely influenced by expectations of interest rate cuts by the Federal Reserve. This situation indicates that a rate cut by BNM would be unnecessary and could potentially lead to inflationary pressures. The recent weakening of the U.S. dollar due to growing concerns about U.S. economic growth has contributed to the appreciation of the Malaysian ringgit. With the Federal Reserve considering rate cuts, the reduction in the interest rate differential is expected to benefit the ringgit.
Overall, the economic outlook for Malaysia remains positive, with stable inflation rates and strong economic growth. The decision by BNM to maintain interest rates reflects the central bank’s commitment to fostering economic stability amidst external economic uncertainties.