Bank Negara maintains interest rate at 3.25%

According to economists and analysts, the appointment of Muhammad(pic) is a positive development as it helps alleviate a lot of market uncertainties about Malaysia

PETALING JAYA: Bank Negara has decided to maintain the overnight policy rate (OPR), on which commercial banks base their deposit and lending rates, at 3.25%.

The benchmark rate was last adjusted with a 25-basis point (bp) hike in July 2014, while the statutory reserve requirement (a requirement for commercial banks to set aside a certain amount of their cash with their central banks on a mostly interest-free basis) was revised with a 50bp cut to 3.50% this February.

While the monetary-policy stance was not unexpected by the market, there was some speculation that Bank Negara could cut the OPR given the slowing economy.

The economy grew 4.2% in the first quarter compared to the same quarter a year ago, but the pace of growth has slowed to levels seen during the global financial crisis of 2008/2009.

Inflation, while averaging 3.4% in the first quarter, should trend lower for the rest of the year.

The central bank, which released a statement following the monetary policy committee meeting chaired for the first time by Datuk Muhammad Ibrahim (pic) as Bank Negara governor, said “the stance of monetary policy is accommodative and supportive of economic activity”.

Muhammad succeeded Tan Sri Dr Zeti Akhtar Aziz on May 1 as the central bank chief.

It said policymakers were cognizant of downside risks in the global economic and financial environment.

It added that policymakers would be closely monitoring and assessing their implications on domestic price stability and growth to ensure policy stance remains consistent with sustainable growth of the economy.

Furthermore, policymakers remain satisfied with domestic financial conditions, which remain stable.

“The financial system continues to be sound, with improved liquidity in the domestic financial system, continued orderly functioning of the financial and foreign exchange markets, and financial institutions operating with strong capital and liquidity buffers,” it said.

The move to maintain the OPR comes at a time when the US Federal Reserve has turned more hawkish.

The release of the April meeting’s minutes of the Federal Open Market Committee (FOMC) showed that US policymakers were mulling a rate increase should the US economy continue to improve.

The benchmark federal funds rate was raised to between 0.25% and 0.50% last December after the Fed had left it at near zero for seven years.

The Fed’s policymakers have signaled that a rate hike of at least 25bps could be in the cards when the FOMC meets in June. Economists believe that there would be at least two rate hikes totalling 50bps this year.

The US rate hikes would have implications for crude oil prices, emerging-market currencies and bonds.

Policymakers here remain confident that the economy would be able to expand by 4% to 4.5% this year despite expecting the first-half to grow slower than the same period of 2015.

“Going forward, economic activity is expected to improve with domestic demand remaining the key driver of growth.

Private consumption is expected to expand further, supported by continued growth in wages and employment, and the additional disposable income from measures announced during the 2016 Budget Recalibration,” the central bank said. The economy grew by 5% last year.

It pointed out that overall investment activity would remain supported by the implementation of infrastructure projects and capital spending in the manufacturing and services sectors despite private investments having moderated due to a downturn in the oil and gas as well as plantation industries.

It noted that external headwinds would continue to weigh on the economy with structural issues and geopolitical developments continuing to constrain global economic growth.

The statement also said that future monetary policy statements would be released at 3pm on the second day of the policy meeting. Previously, the statements were embargoed till 6pm.

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