Monetary Policy Statement

At its Monetary Policy Committee (MPC) meeting today, the MPC of Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.

The global economy continues to gain strength with growth being more broad based and synchronised across regions. Global trade sustained its strong momentum. In the advanced economies, higher wages and diminishing labour market slack remain supportive of growth. Additional policy support, particularly in the US, is expected to lift growth further. In Asia, growth will be driven by sustained domestic activity and strong external demand. Financial markets continue to face intermittent volatility amid rising trade tensions. Global growth prospects remain balanced although there are risks should trade and geopolitical tensions worsen.

For the Malaysian economy, latest indicators point towards continued expansion in private sector activity and exports. Going forward, the positive growth momentum is expected to be sustained, driven by the strength in both domestic and external demand. Private consumption will be supported by favourable income and labour market conditions. Investment activity is projected to be sustained by implementation of ongoing infrastructure projects and capacity expansion by firms. On the external front, exports are expected to continue benefitting from the positive momentum in global growth and trade in advanced and regional economies. Overall, the prospects for the Malaysian economy remain strong.

Headline inflation is expected to remain moderate for the year as a whole on expectations of a smaller effect from global cost factors. A stronger ringgit exchange rate compared to 2017 will mitigate import costs. However, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, is projected to remain moderate amid stable demand conditions.

Despite financial market volatility due to external developments, domestic financial markets have remained resilient. Malaysia’s economic fundamentals are strongly anchored. The domestic economic outlook remains positive, the financial sector is strong and monetary and financial conditions are supportive of economic growth in the post-election environment.

At the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid lower inflation. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.

http://www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4674&lang=en

Notes:

1. Private consumption, also referred to as personal consumption, consumer expenditure, or personal consumption expenditures (PCE), measures consumer spending on goods and services. Private consumption includes all purchases made by consumers, such as food, housing (rents), energy, clothing, health, leisure, education, communication, transport as well as hotels and restaurant services. It also includes durable goods (such as cars), but not households’ purchases of dwellings, which are counted as household investment.

Consumer spending accounts for between half and two-thirds of Gross Domestic Product (GDP) in most countries. Generally, the poorer the country the higher the share of consumption, but there are notable exceptions to this rule (i.e. China, with a rather low ratio, and the United States, with a high proportion). Since private consumption accounts for the largest part of GDP, it is the key engine that drives economic growth.

2. Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods, as a way of determining how much inflation is occurring in the broad economy. The CPI uses a base year and indexes the current year's prices according to the base year's values.

As it includes all aspects within an economy that experience inflation, headline inflation is not adjusted to remove highly volatile figures, including those that can shift regardless of economic conditions. Often, headline inflation is closely related to shifts in the cost of living, which provides useful information to consumers within the marketplace.

The headline figure is not adjusted for seasonality or for the often-volatile elements of food and energy prices, which are removed in the core CPI. Headline inflation is usually quoted on an annualized basis, meaning that a monthly headline figure of 4% inflation equates to a monthly rate that, if repeated for 12 months, would create 4% inflation for the year. Comparisons of headline inflation are typically made on a year-over-year basis, also known as "top-line inflation."

3. Accommodative monetary policy occurs when a central bank (such as the Federal Reserve) attempts to expand the overall money supply to boost the economy when growth is slowing (as measured by GDP). 

The policy is implemented to allow the money supply to rise in line with national income and the demand for money.

Accommodative monetary policy is also known as "easy monetary policy" or "loose credit policy."

When the economy slows down, the Federal Reserve can implement an accommodative monetary policy to stimulate the economy. 

It does this by running a succession of decreases in the Federal funds rate, making the cost of borrowing cheaper. 

Accommodative money policy is triggered to encourage more spending from consumers and businesses by making money less expensive to borrow through the lowering of short-term interest rates.

When money is easily accessible through banks, the money supply in the economy increases. This leads to increased spending. 

When businesses can easily borrow money, they have more funds to expand operations and hire more workers, which means that the unemployment rate will decrease. 

On the other hand, people and businesses tend to save less when the economy is stimulated due to the low savings interest rates offered by banks.

Instead, any additional funds are invested in the stock market, pushing up stock prices.