Financial sector stays sound

OVER the near term, monetary and financial conditions will continue to be accommodative and supportive of economic growth.

The domestic financial sector is expected to remain sound, supported by financial institutions operating with strong capital and liquidity buffers.

Nonetheless there are risks, and these are mostly associated with global uncertainties – particularly the pace of monetary policy normalisation in the US and other major economies, geopolitical developments as well as escalating global trade tensions.

The monetary policy continues to be supportive in providing a conducive environment to promote growth while maintaining price stability.

The overnight policy rate (OPR) was increased by 25 basis points (bps) to 3.25% in January and kept unchanged during the subsequent nine months.

Meanwhile the statutory reserve requirement (SRR) was held steady at 3.5%.

Interest rates in the banking system rose in tandem with the OPR adjustment in January. The OPR was adjusted upwards to normalise the degree of monetary accommodation amid steady growth of the economy. The weighted base rate of commercial banks was increased to 3.9% as at end-July. The weighted average lending rate (ALR) was at 5.44%.

Meanwhile, the interest rate on the savings deposit of commercial banks increased six bps to 1.05% as at end-July.

The interest rates on fixed deposits of one-month to 12-month maturities ranged between 3.08% and 3.33%.

Monetary aggregates continued to grow during the first seven months of 2018. M1 grew 4.7% to RM411.1bil as at end-July following higher demand deposits which increased 4.8%. Similarly, M3 rose 6.6% to RM1,786.9bil contributed by claims on the private sector, particularly loans.

Moving forward, the money supply is expected to be supported by the extension of credit to private sector in the form of loans and securities.

The ringgit, along with all regional currencies, faced significant depreciation pressure against the US dollar, despite its strong performance in the first quarter.

The ringgit’s performance in the first quarter was mainly driven by non-resident portfolio inflows as the OPR increase signalled a sustained strong growth outlook for the economy.

However, from April onwards, expectations of a faster pace of monetary policy normalisation in the US and the strengthening of the US dollar, led to non-resident portfolio outflows from regional economies, including Malaysia.

As at end-August 2018, the ringgit in line with other regional currencies depreciated within the range of 0.6% to 7.7% against the US dollar.

Looking ahead, the ringgit will be more reflective of the underlying fundamentals of the domestic economy when external uncertainties recede.

In conclusion, monetary policy is expected to remain accommodative and supportive of economic growth while ensuring price stability. Meanwhile, the capital market is expected to remain resilient, supported by favourable domestic economic conditions and steady global growth.

However, external factors which include the pace of monetary policy normalisation in the major economies, escalating trade threats and protectionism, rebalancing of global investment flows and geopolitical tensions may dampen financial and capital market performance.