Thursday, 17 May 2012


th May 2012
Malaysian central bank is playing a waiting game
been signs of a slowdown in the economy in early 2012, and low inflation gives BNM room to cut
still expect BNM to loosen policy later in the year as the global economy loses momentum.
Bank Negara Malaysia (BNM) left its policy rate unchanged at 3% today, as expected. There have. We
rates to be left unchanged. Governor Zeti said earlier in the week that the government's decision to
introduce a minimum wage is unlikely to generate higher inflation. She also downplayed the liquidity
risks facing Asia as a result of the crisis in the euro zone. The comments suggested that a rate change
was unlikely.
All 19 of the economists surveyed by Bloomberg before today’s meeting, including us, expected interest
We agree that the new minimum wage is unlikely to put much upward pressure on inflation. (See our
ringgit ($297) per month in most states, and will bump up the wages of a sizeable proportion of the
country's workers. But firms have six months to comply with the rules (small companies have one year).
Moreover, wage growth has been running at a rapid clip for about two years without feeding into a
marked acceleration in headline inflation.
, ”What is the likely impact of Malaysia’s minimum wage?”, published on 1st May.) It is set at 900
within a range of 2-3%. In March, inflation was just 2.1% y/y, one of the lowest in Asia. Slower
economic growth and falling commodity prices should keep inflation subdued. Geopolitical tensions
between Iran and the West could still push oil prices higher, but the impact on Malaysian inflation
would be dampened by fuel subsidies.
We have kept our inflation forecast at 2% in 2012 and 2.5% in 2013. BNM expects inflation to be
leaves room to cut it if needed
slowed from the 5.3% y/y recorded in Q4. Export growth and industrial activity have both weakened.
(See Chart 1.) The recent drop back in the global composite PMI suggests that the outlook for exporters
remains poor, even if, as BNM acknowledged in its policy note, domestic demand is likely to hold up.
The sanguine inflation outlook means that there is little pressure on BNM to raise its policy rate, and. Meanwhile, data in early-2012 suggest that economic growth has
banks. This is especially true for Malaysia. The claims of euro-zone banks on local banks are lower
as a proportion of total credit in the economy than in most parts of Asia. In general, Malaysian banks
fund loan growth out of deposits. (See our
euro break-up?” published on 23
Governor Zeti is right that few economies in Asia are vulnerable to a withdrawal of funding by eurozoneEmerging Asia Focus, “How would emerging Asia cope with ard February.)
equivalent to almost 7% of GDP in 2011 – only a few Asian economies have higher exposure. This
means that continued recession in the euro-zone will weigh on Malaysia’s economy as the year
rate ending 2012 at 2.75%
But Malaysia is still exposed to problems in Europe through trade. Exports to the euro-zone wereAccordingly, we have pencilled in a rate cut of 25bp in September. We see the overnight. (See Chart 2.)
Daniel Martin
Asia Economist (+65 6595 1510,

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