However, BNM’s focus on economic growth suggests that containing sticky inflation has taken a backseat, and this could spell trouble for the economy moving forward, says an analyst.
Bank Muamalat chief economist Afzanizam Rashid said BNM’s decision provides relief to borrowers as the cost of funds have been maintained, which means Malaysians’ monthly debt repayment will remain the same.
He said keeping the OPR steady means the current trajectory for monetary policy will be supportive to growth. “This is because stability in the benchmark interest rate improves the predictability of financing cost,” he added.
Malaysia University of Science and Technology economics professor Geoffrey Williams believes the decision to hold the benchmark rate is the “correct one”.
“It signals that BNM has been effective in bringing down headline inflation, and supporting underlying growth and financial stability in the difficult global economic environment,” he told FMT Business.
This gives confidence to markets the central bank is sticking to its mandate, and that economic growth in the coming year will not be harmed by higher interest rates, he added.
BNM’s mandate is to promote monetary and financial stability. This entails providing a conducive environment for the sustainable growth of the Malaysian economy.
Williams said the pause will also be supportive of growth and investment, and will help keep down inflation because real interest rates are now positive, with inflation below the OPR.
“It should be a relief to borrowers that costs of borrowing are not higher and this will support consumer spending,” he added.
Dark clouds of inflation
Pacific Research Center of Malaysia principal adviser Oh Ei Sun said while inflation remains elevated, as felt by the man in the street, economic revitalisation will remain sluggish.
“A higher OPR would [only] worsen that while a lower OPR would engender even higher inflation,” he warned.
He opines the imperative to continue maintaining economic growth has overtaken the lowering of inflation as the primary driving factor for deciding the OPR.
“It thus forebodes a grimmer economic future for the country,” he told FMT Business.
Oh said BNM has found itself between a rock and a hard place, trying to combat inflation and stimulating the economy simultaneously.
However, Afzanizam does not subscribe to the view that inflation presents a danger to the economy. He pointed out that the inflation rate has come down to 1.9% in September from 4.7% in August last year.
He said this means the monetary tightening that BNM has embarked on has led to price stability. “The objective has been achieved thereby vindicating the credibility of BNM to manage the country’s overall inflation rate,” he argued.
The ringgit dilemma
Malaysia finds itself in the unusual position of having brought headline inflation under control while its currency has been facing a torrid time, plunging to a 25-year low of 4.7958 against the US dollar last week.
With the ringgit in dire straits, the central bank has faced increased pressure to hike the OPR to defend the beleagured currency.
By keeping the OPR steady, BNM has bucked the trend which has seen its Asean neighbours such as Indonesia, the Philippines and Thailand raising their lending rates recently to support their weakening local currencies.
Oh said BNM’s decision to hold the interest rate will “do little to stop the ringgit’s slide”. “In theory it doesn’t make it more costly to borrow to engage in trade,” he said.
However, Afzanizam does not think BNM’s maintaining a pause on its OPR hiking will have an influence on the ringgit’s value.
“It has already been priced in, and the exchange rate has been very much driven by external factors, namely the US Fed fund rate,” he said.
The US Federal Reserve’s funds rate stands at 5.25%-5.5%. With the OPR paused at 3% since July, there is huge -2.5% differential to the fed funds rate, sparking an outflow of funds to US dollar-denominated assets.