The central bank said that its decision to hike the overnight policy rate by 25 basis points to 3.0% on May 3 was made after referring to the latest data which indicates that the economy continues to gradually strengthen.
During today’s quarterly GDP update, BNM noted that Malaysia’s economic growth has already exceeded pre-pandemic levels with the unemployment rate falling and households remaining resilient.
Today’s report revealed that Malaysia’s economy grew 5.6% in the first quarter of this year. The unemployment rate fell to 3.5% (2019: 3.3%) while the retail trade index – a proxy for household spending – stood at 168.8, higher than the 2019 average of 139.5.
“After four consecutive OPR adjustments in 2022, we decided to pause (the hike) at our January and March MPC (monetary policy committee) meetings this year to take stock of the impact from the 100 basis-points adjustment,” said governor Nor Shamsiah Yunus.
“Amid resilient domestic growth prospects, the MPC judged that it was the right time to adjust the degree of monetary policy accommodation,” she added.
Shamsiah explained that the greater expansion in economic activity and stronger domestic demand continue to contribute to price pressures, keeping inflation elevated, which has been a trend in many countries.
“In some cases, monetary policy was slow to react resulting in the need for policy interest rates to be raised more quickly and aggressively. We certainly do not want to be in that situation, so we must be prudent,” she explained.
Additionally, the central bank added that keeping inflation too low could lead to high inflation or financial imbalances in the future. However, BNM does not see risks of financial imbalances in the economy at present.
Avoiding SVB in Malaysia
BNM emphasised that spillovers from the United States banking sector stress have been limited, given all banks in Malaysia are subject to the same stringent regulations.
Collectively, banks in Malaysia have a high level of resilience due to high levels of liquid assets in the form of placements and government bonds.
As of March 2023, banks’ average liquidity coverage ratio was 157%, with a total of RM763 billion in high-quality liquid assets to meet “any potential additional liquidity needs”.
“We are here to make sure the banks are sound so they can continue to get the confidence of the depositors,” said Shamsiah.
“We have seen in the US where depositors lose confidence in the bank, like the case of SVB (Silicon Valley Bank), the kind of adverse impact it will have on the economy and the financial system. We certainly do not want that,” she clarified.
BNM’s internal simulation concludes that even if they were to revalue bonds held at amortised costs, banks’ capital would only be reduced by 1.1 percentage points, remaining above the regulatory minimum.