Bank Negara Malaysia maintains OPR despite increasing inflation

Bank Negara Malaysia maintains OPR despite increasing inflation

Economics 101 in less than 100 words

Briefly, if we are faced with threat from inflation, the interest rate will be raised to fight inflation. This monetary policy which deals with controlling the supply of money in order to ensure an orderly economic growth for the country. If the economy is unwell, the central bank may also reduce the interest rate in order to encourage more investments and consumption and thus help to push the economy to move.

Malaysia is at that stage where economic growth is more important than controlling inflation. Bank Negara Malaysia has thus decided that the Overnight Policy Rate (OPR) will be maintained to support the economy first. Dealing with inflation can be a little later. Good decision in my opinion.

Full press release from Bank Negara Malaysia

At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 1.75 percent.

The global economy continues to recover, supported by manufacturing and trade activity. Labour market conditions have also improved in many countries. However, several countries reintroduced measures to curb ongoing COVID-19 resurgences, causing some moderation in the pace of recovery in domestic activity, especially services. Inflation remains elevated in a number of countries, driven by both supply and demand factors. Going forward, continued progress in vaccination coverage, advancements in vaccine efficacy, and the availability of anti-viral treatments will allow for better management of the pandemic, hence supporting global growth prospects. The global growth outlook will continue to be affected by uncertainties over the emergence of new variants of concern, risks of prolonged global supply disruptions, and risks of heightened financial market volatility amid adjustments in monetary policy in major economies.

For Malaysia, the latest high-frequency indicators show that economic activity rebounded in the fourth quarter, in line with the relaxation of containment measures. For 2021, growth will be within the projected range of 3% – 4%. Looking ahead, growth is expected to gain further momentum in 2022. This will be driven by the expansion in global demand and higher private sector expenditure amid improvements in the labour market and continued policy support. Risks to the growth outlook, however, remain tilted to the downside. Such risks may arise from a weaker-than-expected global growth, a worsening in supply chain disruptions, and the emergence of severe and vaccine-resistant COVID-19 variants of concern.

Headline inflation has averaged 2.3% for the period January-November 2021. For 2022, average headline inflation is likely to remain moderate as the base effect from fuel inflation dissipates. Underlying inflation, as measured by core inflation, is expected to edge upwards as economic activity normalises amid the environment of high input costs. Nevertheless, core inflation is expected to be modest, with upside risk contained by the continued slack in the economy and labour market. The outlook, however, continues to be subject to global commodity price developments amid risks from prolonged supply-related disruptions.

The MPC considers the current stance of monetary policy to be appropriate and accommodative. Fiscal and financial measures will continue to cushion the economic impact on businesses and households and provide support to economic activity. The stance of monetary policy will continue to be determined by new data and their implications on the overall outlook for inflation and domestic growth.

Bank Negara Malaysia
20 January 2022

— end of press release —

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