KUALA LUMPUR: Bank Negara Malaysia kept borrowing costs unchanged in its latest policy decision, giving further public assurance that the money and foreign exchange markets will continue to function in an orderly manner.
“The ringgit will reflect the fundamentals of the economy when the external and domestic uncertainties recede.”
It said the exchange rate is being affected by global factors that are affecting many emerging and commodity producing economies.
The Monetary Policy Committee said in a statement yesterday that the current stance of the policy at 3.25 per cent remains accommodative and supportive of economic activity.
Yesterday the ringgit opened trading at 4.3197 versus the US dollar and closed at 4.3168 from Thursday’s close at 4.3127.
According to Bloomberg estimates, the ringgit weakened by 1.4 per cent this week and has been down by 19 per cent for year-to-date.
Economists polled by research houses said the central bank stayed pat yesterday due to the weakness in ringgit, which had fallen to 17-year low.
Bank Negara also stressed yesterday that the financial system remains sound, with healthy growth in financing.
“While global and domestic factors have affected the ringgit exchange rate and domestic financial markets, overall domestic liquidity conditions remain stable,” it said, adding that the financial system remains sound, with healthy growth in financing.
On the higher inflation rate, the central bank said despite the weaker ringgit exchange rate, the impact on overall inflation has been limited by the lower commodity prices and low global inflation.
But it warned that headline inflation is expected to peak in early 2016 before it moderates for the remainder of the year.
Headline inflation averaged at 2.9 per cent in June and July reflecting higher domestic fuel prices and the impact of the GST.
Meanwhile, in its analysis about the risks to growth, the central bank said the third quarter will continue to see expansion in economic activities although private consumption will moderate as households continue to adjust to the implementation of the Goods and Services Tax (GST) as well as the uncertainties.
“Household spending will however be supported by wage growth and stable labour market conditions,” it said, adding that investment activity will also be led by capital spending in the manufacturing and services sectors, and ongoing infrastructure projects.
Domestic demand will continue to drive growth mitigating the weak performance of the external sector.
Downside risks to growth have however risen amid greater uncertainty on both the global and domestic fronts.
“Of significance, Malaysia is entering this challenging period from a position of strength given the diversified sources of growth of the economy,” it stated, referring to the low unemployment level, manageable level of external indebtedness, and a well-capitalised banking system.
Growth will remain within the region of 4.5 to 5.5 per cent, supported by domestic demand.