Bank Negara Malaysia is anticipated to hold its key interest rate steady, according to a recent poll of economists conducted by Reuters. This decision comes as the country’s economic growth remains robust, with inflation levels being well-controlled. Despite the stability in inflation at 2.0%, the Malaysian ringgit has experienced a significant turnaround, transitioning from one of the weakest performing Asian currencies to one of the strongest in the region in recent weeks.
All 30 economists surveyed in the poll unanimously agreed that BNM would maintain its overnight policy rate at 3.00% on September 5th. Additionally, an average forecast from a smaller sample suggested that interest rates would remain unchanged until at least 2026. This outlook has remained consistent throughout the year and is in stark contrast to expectations for major central banks worldwide, which are anticipated to implement rate cuts by 2024.
The decision to keep the interest rate steady is largely influenced by Malaysia’s strong economic performance. The country’s Gross Domestic Product (GDP) expanded by 5.9% in the last quarter, marking the fastest growth rate in 18 months. This growth has been primarily driven by robust household spending, increased exports, and higher levels of investment. Despite expectations of rising inflation in the second half of 2024, primarily resulting from changes in diesel subsidies, experts believe that a rate cut is unlikely in the near future.
In light of recent policy changes aimed at reducing diesel subsidies, the central bank is closely monitoring inflation levels. While there may be an uptick in inflation following these adjustments, the bank remains confident that inflation will remain manageable. Given that the Malaysian ringgit has appreciated by approximately 6% this year, primarily due to expectations of interest rate cuts by the Federal Reserve, implementing a rate cut domestically is viewed as unnecessary and potentially inflationary.
The strengthening of the Malaysian ringgit can be attributed to broader market trends such as the weakening of the U.S. dollar. With growing concerns about U.S. economic growth, the Federal Reserve is expected to implement interest rate cuts soon. As a result, the interest rate differential between the U.S. dollar and the Malaysian ringgit is narrowing, which is favorable for the latter currency. Analysts believe that these market dynamics, rather than domestic factors, will have a more significant impact on the Malaysian ringgit in the foreseeable future.