EMERGING ASIA ECONOMICS UPDATE

EMERGING ASIA

ECONOMICS UPDATE

11

th May 2012

Malaysian central bank is playing a waiting game

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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

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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

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We agree that the new minimum wage is unlikely to put much upward pressure on inflation. (See our

Update

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

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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

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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

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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.)

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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

progresses.

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, daniel.martin@capitaleconomics.com)