Malaysia set to extend rate pause as ringgit outperforms peers

MALAYSIA is expected to keep its benchmark interest rate unchanged on Thursday as low inflation and a currency that is performing better than its peers spare policymakers the pressure that led to a surprise hike in Indonesia last month.

Bank NegaraMalaysia will likely keep its overnight policy rate at 3 percent, according to 24 economists polled in a Bloomberg survey. The central bank last adjusted borrowing costs a year ago, when it raised the benchmark by a quarter point.

Malaysia is under no immediate pressure to follow the lead of Indonesia, which has indicated there will be no further tightening.

The ringgit recovered after hitting a 26-year low in February against the dollar, outperforming most Southeast Asian countries this year after the central bank strengthened its currency's defense. This gives BNM room to support the economy as it assesses the impact of long-awaited subsidy reforms on inflation.

The central bank will likely stick to a neutral tone in its statement, reflecting that BNM is comfortable with the current policy rate, said Yun Liu, ASEAN economist at HSBC Holdings.

Here's what to watch for in Thursday's statement at 3 p.m. local time:

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Friday, 8:30 a.m.

Asian business

Business outlook focused on the fast-growing economies of Southeast Asia.

Inflation outlook

Although they remain benign, price pressures are likely to increase this year due to upcoming reductions in fuel subsidies. This view was reflected in the wide range of central banks' inflation forecasts of between 2 and 3.5% for 2024.

The government said it would continue the removal of general oil subsidies and channel the resulting savings into targeted aid. The exact timing and mechanism will be the main risk to inflation in the coming months, according to Lavanya Venkateswaran, senior ASEAN economist at Oversea-Chinese Banking Corp in Singapore.

Prime Minister Anwar Ibrahim has already said he expects inflation to rise slightly after announcing a record increase in civil servants' salaries from December. Immediately, Malaysians will be able to withdraw up to 10 per cent of their retirement funds from May.

This could result in cash outflows of between RM20 billion (S$5.7 billion) and RM30 billion from the employees' provident fund in the first year, according to AmInvestment Bank Bhd in a research note.

Ringgit support

Malaysia's interest rate remains at a record differential to that of the Federal Reserve, weighing on the local currency which has depreciated since the last BNM rate meeting. Malaysia's reserves fell 0.5 percent to $112.8 billion at the end of last month from mid-April.

There are, however, some positive signs. Rising oil prices have contributed to demand for the currency from oil exporters, helping to relieve pressure on the ringgit.

Growth trajectory

Malaysia's economy accelerated the most in a year in the first quarter, according to preliminary estimates, signaling that a firmer recovery is underway.

The country's external position is expected to improve in 2024 thanks to increased tourism spending and a rebound in technology exports, according to analysts at Malayan Banking Bhd. Underlying economic conditions imply that pressure would be reduced for BNM to cut rates, they added.

The central bank expects gross domestic product to grow 4 to 5 percent this year, after falling short of expectations in 2023. BLOOMBERG

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