BNM to Keep Interest Rate Unchanged Through 2025

By Pranoy Krishna
BENGALURU (Reuters) – Bank Negara Malaysia (BNM) will leave its key interest rate unchanged on Thursday and maintain it until at least 2025 as growth remains robust and inflation stays controlled, according to a Reuters poll of economists.

While BNM has effectively managed inflation, currently at 2.0%, the Malaysian ringgit has recently shifted from being one of the worst-performing Asian currencies to one of the strongest.

This suggests the central bank isn’t in a rush to lower rates, aiming to avoid weakening the currency and importing inflation.

All 30 economists surveyed from August 27 to September 2 predicted BNM would keep its overnight policy rate at 3.00% on September 5. A median from a smaller sample indicated rates would remain stable until at least 2026, a view consistent since the year’s start.

This contrasts with expectations for major central banks to cut rates at least once in 2024.

“There is no reason for BNM to change the policy rate right now… as growth is at the higher end of expectations and inflation has been surprisingly benign,” said Lavanya Venkateswaran, senior ASEAN economist at OCBC Bank.

Malaysia’s gross domestic product (GDP) grew 5.9% last quarter, the fastest pace in 18 months, driven by strong household spending, exports, and investment.

Inflation is expected to rise in the second half of 2024 due to uncertainties from a recent policy on reducing diesel subsidies, suggesting that the central bank is unlikely to cut rates soon.

“There is still uncertainty about the timing of further fuel subsidy rationalization. The bank is likely monitoring second-round effects from the previous diesel fuel subsidy removal, so a cut would seem premature,” noted Moorthy Krshnan, senior Asia economist at Pantheon Macroeconomics.

The central bank stated inflation would remain manageable even if it trends higher following diesel subsidy cuts in June.

The Malaysian ringgit has appreciated by about 6% this year, buoyed by increasing expectations that the Federal Reserve might cut interest rates as early as this month, which has weakened the U.S. dollar.

This situates a rate cut from the central bank as unwarranted and likely inflationary. “The more significant determinant for the ringgit has been a weaker dollar story, as U.S. growth concerns have increased. With the Fed poised to make cuts, the narrowing interest differential should positively impact the ringgit,” added Krshnan.