BNM maintains OPR, raises SRR

KUALA LUMPUR: Bank Negara Malaysia (BNM) kept the overnight policy rate (OPR) unchanged at 3%, but hinted in its monetary policy statement on Thursday, July 7 that it could initiate further monetary tightening to keep inflation in check while sustaining economic growth.

The central bank, raised the statutory reserve requirement (SRR) by 100 basis points (bps) from 3% to 4%. BNM said the measure, effective July 16, is pivotal to manage the significant build-up of liquidity which might result in financial imbalances and create risks to financial stability.

BNM said its decision to maintain the OPR at 3% stemmed from the monetary policy committee's (MPC) assessment that risks to inflation are on the upside. While the outlook for growth remains positive, BNM said there are heightened uncertainties from global developments which had resulted in higher downside risks to growth for the domestic economy.

"The MPC will carefully assess the evolving economic conditions and to the extent that the growth momentum is sustained, further normalisation of monetary conditions will be considered to safeguard price stability," the central bank said.

According to BNM, global economic recovery in the second quarter of the year was affected by supply disruptions due to natural disasters and geopolitical developments, apart from the impact of fiscal consolidation, uncertain conditions in global financial markets and higher commodity prices.

BNM said global growth would remain highly uneven across regions, with increased downside risks. For the region, the central bank said growth was expected to be sustained by robust domestic demand, increased investment activity and intra-regional trade.

In Malaysia, BNM said the latest indicators suggested a moderation in economic growth during the second quarter, mainly due to slower external demand, greater-than-expected disruptions in the global manufacturing supply chain, and lower-than-projected public sector investment.

"Private consumption and investment have, however, continued to be important drivers of growth.

"Going forward, growth is expected to improve, underpinned by continued strength in private consumption and private investment. This growth prospect, however, could be affected by the heightened external risks," it said.

Inflation concerns remain with supply factors being the key determinant affecting consumer prices as global commodity and energy prices are projected to remain elevated. The regulator also expects domestic demand to exert upward pressure on prices in the second half of the year.

Commenting on BNM's latest monetary stance, AmResearch Sdn Bhd senior economist Manokaran Mottain said although the local economy was losing momentum due to weakening exports, inflationary pressures were under control as commodity prices were easing.

"That's our call," Manokaran said.

AmResearch had earlier predicted that BNM would maintain the OPR at 3% to sustain domestic demand against a backdrop of weaker global economic landscape which might hurt exports.

The research house had also anticipated the central bank would raise the SRR by 1% to mitigate the build-up in liquidity which might further inflate asset prices.

However, BNM's latest monetary stance may have come as a surprise to the market as most had expected the central bank to raise the benchmark rate. Of the 15 research houses surveyed by Bloomberg, 10 were expecting a 25bps hike in the OPR to 3.25%.

AmResearch did not participate in the Bloomberg survey. BNM had during its previous MPC meeting in May raised the OPR by 25bps from 2.75% to 3%. The central bank had indicated that its future stance on monetary policy would depend on its assessment on risks to growth and inflation prospects. The regulator had also increased the SRR from 2% to 3% then. SRR is the interest-free deposit which financial institutions have to place with the central bank.

The OPR has been raised four times, 25bps each, since March 2010.

In terms of external trade, Malaysian exports have been disappointing as growth slowed to 5.4% in May from a year earlier, dragged down by slower sales of electrical and electronic (E&E) products, commodities, and non-E&E items. Imports also rose at a weaker rate of 5.6% as the country purchased fewer capital and intermediate goods.

In April, Malaysian exports grew 11% from a year earlier, while imports expanded 9.4%. Economists said lower imports of capital goods suggested that business spending could slow down in the coming months while the decline in intermediate goods purchases indicated that the country's exports might ease going forward.

In May, the country's inflation, as measured by the consumer price index (CPI), rose 3.3% from a year earlier, a 25-month high.

Economists expect the CPI to rise further in the near term, spurred by electricity tariff and gas price hikes, apart from global commodity and food prices.