PETALING JAYA: The financial system in Malaysia is sound, says economist Geoffrey Williams.
He said Bank Negara’s decision to maintain the overnight policy rate (OPR) at 3% was a well-managed mandate by the central bank.
“The economy is growing and is likely to sustain strong growth this year. Inflation is back to normal levels and core inflation fell slightly in recent data recorded,” he said.
According to Williams, this sets a good, stable macroeconomic environment which means the OPR is at the right level and there is no need for change.
For now, structural reforms should take priority, in particular rationalisation for subsidies, Williams said, as impact on prices are likely, but will soon taper off.
“Bank Negara continually monitors the economic environment, including prices and the exchange rate.
“It can be relied on to take moderate and appropriate action when necessary, but for the moment the economy is in good shape and headwinds are normal,” he noted.
The decision to keep the OPR at 3% was announced this week after the Monetary Policy Committee (MPC) met over a two-day discussion.
The OPR rate has been fixed at the current level since May 3, 2023.
A quick survey of market reports showed that Bank Negara is expected to keep the OPR unchanged for the entire year at 3%.
Hong Leong Investment Bank Bhd (HLIB) said it will adopt a wait-and-see approach, as the current monetary policy has continued to support the economy, aligning with the central bank’s evaluation of inflation and growth.
“The firm growth momentum is expected to be sustained in 2025, driven by domestic expenditure.
“In line with our view, growth is expected to be supported by household spending, supported by a healthy labour market and policy measures including the increase in the minimum wage and civil servant salaries,” HLIB said.
It added investment activity will be sustained by further progress in multi-year projects, the high realisation of approved investments and the implementation of initiatives under the national masterplans.
Similarly, BIMB Securities said the MPC had reiterated its commitment to monitor developments closely while ensuring that monetary policies remain supportive of sustainable economic growth.
“In our view, the MPC is likely to take a cautious approach, awaiting greater clarity on US trade and tariff policies, upcoming economic data and further domestic policy announcements to fully assess their implications on growth and inflation,” it said.
So far, the new Trump administration said it is considering imposing a 10% tariff on imports from China, which could come into force as early as Feb 1, 2025.
The research house said while it foresees inflationary pressure this year increasing from supply-side factors such as policy changes and rising costs, underlying price pressures are expected to remain manageable, limiting the need for a rate adjustment.
“Bank Negara retains sufficient flexibility to recalibrate its monetary policy if economic uncertainties arise.
“Any adjustments will largely depend on shifts in domestic economic conditions and the inflation outlook, ensuring the central bank can respond effectively to evolving challenges,” it said.
Meanwhile, CGS International (CGSI) Research said while it expects Bank Negara to keep the OPR at 3% throughout the year, there are two opposing factors affecting the central bank’s path.
“At one end, there is the possibility of greater price pressure amid the planned tax hikes and fuel subsidy rationalisation. While this is cost driven, Bank Negara could turn hawkish if there are greater signs of prices being more than transitory,” it said.
Another factor is the central bank could turn dovish if prompted by tariff hikes and its subsequent implications on growth.
The research house cited an example in 2019 where Bank Negara cut the OPR by 25 basis points due to the US-China trade war.
“Although the conditions are fluid, we think the risks to policy changes remain balanced for now,” CGSI Research noted.
It also said the consumer price index showed that inflation eased to 1.7% year-on-year (y-o-y), while core inflation softened to 1.6% y-o-y.
“The moderation in price inflation was mainly attributed to slower y-o-y growth in transport costs at 0.4% in December 2024 amid the lower average price of RON97 versus in December 2023,” it noted.
The lower crude oil price also played a role in this, as it recorded US$74 per barrel in December last year as opposed to US$78 per barrel in December 2023.
The research house opined that four countries including Malaysia will be exposed to repercussions from any changes in the US trade policy.
The other three include Indonesia, Singapore and Thailand.
“Of concern is the Asean-4’s growing trade surplus with the United States which poses a risk to the export sector.
“Indirectly, the impact from a weaker global trade volume itself could spell trouble for the more externally dependent economies, in our view,” it said.
As for the ringgit, it will continue to be driven by external factors, as the narrowing interest rates between Malaysia and advanced economies have proven positive for it.
“Malaysia’s favourable economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage flows, will continue to provide enduring support to the ringgit,” it said.
Additionally, on a global scale, CIMB Investment Bank Bhd said markets are expected to focus on upcoming data from the United States, as well as the potential tariffs on Feb 1, 2025.
Crude oil prices have continued to par recent sanction-related gains, as traders assess the risks of US tariffs on global growth and oil consumption.
