Malaysia maintains key rate at 3%, expects sustained growth

[KUALA LUMPUR] Malaysia’s benchmark interest rate remains unchanged at 3 per cent, said Bank Negara on Wednesday (Nov 6).

The country’s overnight policy rate (OPR) has held steady at 3 per cent since its last hike of 25 basis points in May 2023.

The central bank noted that the current OPR level continues to support economic growth, although it acknowledged that the outcome of the US elections may increase volatility in the near term, in particular to the currency movement.

The performance of the ringgit is largely influenced by external factors, said Bank Negara in a statement after concluding the sixth and final monetary policy meeting for this year. The next monetary policy meeting will be on Jan 22, 2025.

As at 6.30 pm on Wednesday, the ringgit was trading at 4.4030 against the US dollar. Over the past month, the currency has depreciated by 2.8 per cent against the greenback but has appreciated more than 7 per cent year on year.

“Looking ahead, the narrowing interest-rate differentials between Malaysia and the advanced economies are positive for the ringgit,” said the central bank.

Bank Negara anticipates that the country’s favourable economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage fund flows, will continue to support the ringgit.

The central bank’s decision was widely expected by market watchers. Economists polled by Reuters expect Bank Negara to stand pat on rates until at least 2026.

Sheana Yue, an economist at Oxford Economics, highlighted that Malaysia’s domestic conditions are unlikely to support a rate cut at least until the end of 2025.

“We anticipate that Bank Negara will remain on hold throughout 2025, bucking the regional trend of mirroring the US Fed easing cycle,” she said in a note.

Inflation remains manageable

OCBC senior Asean economist Lavanya Venkateswaran also expects Bank Negara to keep the OPR unchanged at 3 per cent next year, but does not rule out the possibility of a rate hike in the second half of 2025 if inflationary pressures intensify.

The country’s headline and core inflation remain modest, averaging 1.8 per cent in the year to date.

Although Bank Negara expects inflation to remain manageable next year due to easing global cost conditions and a lack of excessive domestic demand, the central bank cautioned that government policies may affect the inflation outlook.

This year, the government removed the costly blanket subsidies for diesel, electricity and chicken, and plans to cut subsidies for RON95 (a widely used transport fuel) for high-income earners in mid-2025.

Venkateswaran estimates that the retail price of RON95 could rise by 20 to 25 per cent starting in July 2025, potentially raising average inflation to between 2.6 and 2.8 per cent, year on year, in 2025.

RHB Research economists Chin Yee Sian and Wong Xian Yong expect the country’s inflation to reach 2.7 per cent, after factoring in the impact of gradual subsidy reforms.

Despite recent fluctuations in the ringgit, RHB Research noted that the currency movement reflects improving economic balances, particularly in current and fiscal balances.

“A stronger external environment and a prudent Budget 2025 are expected to help shore up more international confidence in Malaysia,” said Chin and Wong in a report.

Economy will continue to expand

Recent indicators suggest that the growth momentum of the Malaysian economy remains strong, fuelled by resilient domestic spending and increased exports.

Bank Negara said that as the global economy continues to expand, future growth in Malaysia is expected to be bolstered by favourable labour conditions, moderating inflation and a less-restrictive monetary policy.

The recovery in global trade will be supported by both electrical and electronic as well as non-electronic products, though risks remain from geopolitical tensions and market volatility, said the central bank.

Malaysia will unveil its third-quarter gross domestic product figures on Nov 15. According to the Department of Statistics’ advance estimates released last month, the economy is projected to grow by 5.3 per cent year on year in Q3.

During the Budget 2025 announcement last month, Prime Minister Anwar Ibrahim had raised the official forecast for economic growth in 2024 to between 4.8 and 5.3 per cent, from 4 to 5 per cent previously.

Oxford Economics anticipates economic growth to increase to 5.6 per cent this year, up from 3.6 per cent in 2023, before slowing to 4.3 per cent in 2025.