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BNM set to keep key rate unchanged on cooling inflation

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The central bank will maintain the overnight policy rate at 3% for a third straight meeting, according to all 21 economists in a Bloomberg survey.

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Free Malaysia Today
Today’s Bank Negara Malaysia decision on the overnight policy rate will be its final rate review for this year.

KUALA LUMPUR:
Bank Negara Malaysia is expected to keep its benchmark interest rate steady again today, as cooling price pressures, global uncertainty and political resistance to higher borrowing costs are likely outweigh concerns around a weakening ringgit.

BNM will maintain the overnight policy rate at 3% for a third straight meeting, according to all 21 economists in a Bloomberg survey. Borrowing costs were adjusted just once this year, as the central bank took stock of the effect of its cumulative 125 basis points of post-pandemic rate hikes.

Today’s decision – BNM’s final rate review of 2023 – may not be an easy one for the central bank, even as inflation cooled to a 30-month-low last month. Standing pat would buck the hawkish trend rippling across the region as peers look to back their currencies. The ringgit is the second-worst performer in Asia this year as Malaysia’s interest rate remains at a record discount relative to the Federal Reserve’s.

“We see Bank Negara Malaysia facing a dilemma over further interest rate hikes,” said economists at United Overseas Bank in a note. Still, another quarter-point hike would have little impact on Malaysia’s rate gap with the US, they said. They maintained their forecast for the central bank to stay pat on global uncertainty and signs of softening domestic demand.

Policymakers have signalled they are looking elsewhere to defend the ringgit, as easing inflation makes raising borrowing costs difficult to justify to the public.

Prime Minister Anwar Ibrahim has dismissed higher rates as a means to support the ringgit, saying he is instead working on decoupling from the US dollar as a long-term solution.

Separately, BNM governor Abdul Rasheed Ghaffour said the bank would continue to ensure orderly ringgit movements. BNM has already been keeping liquidity tight by selling bills to support the currency, and the nation’s interbank rate has risen to the highest level since February.

A number of factors favour a hold, including inflation that is back near the long-term average. More importantly, Bloomberg’s analysis suggests a hike would unlikely turn ringgit sentiment around. It would, though, add to growth headwinds from tighter fiscal policy and weaker global demand.

To be sure, there may still be a case for a rate hike in the future. Malaysia’s inflation outlook faces upside risks from multiple fronts, from plans to cut subsidies to geopolitical tensions, including the Israel-Hamas conflict. Price pressures could average by as much as 3.6% next year, according to the government, compared to between 2.5% and 3% in 2023.

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