Malaysia:BNM holds -statement notes increased downside risks to global growth

Bank Negara (BNM) kept its overnight policy rate (OPR) unchanged at 3.25% (J.P. Morgan and consensus: nochange).

    BNM expects PCE to ease, investment to remain resilient - The tone of the statement echoed the narrativefrom the November policy meeting, noting that domestic demand is expected to drive growth, with fixedinvestment remaining resilient even as private consumption eases.

    Downside risks to global growth have increased - The statement also noted that “the downside risk to theglobal economic outlook has increased following the weakening growth momentum in a number of majoreconomies due to external and domestic specific factors.”

    Policy outlook likely to focus on external demand and consumption - Given the tone from the statement,the outlook for monetary policy will likely continue to hinge on the outlook for external demand and also on theevolution of private consumption.

    Monetary conditions easing through FX, watching PCE - While J.P. Morgan is not expecting to see amaterial lift in exports, the near-term focus thus remains on consumption. PCE has some downside risk given theimpact of lower real estate prices, tightening credit conditions and the ongoing terms of trade shock and is alsocaptured in the sentiment indicators (first chart). In this respect, the easing in monetary conditions has comemainly via the weakening of the currency in both bilateral terms vs. the US$ and in nominal effective terms whichhas helped mitigate the impact of lower commodity prices. This FX flexibility will likely continue (second chart).

    In the event that private consumption stumbles in 2015, this could potentially open some room for moremonetary flexibility though this is not the extant forecast.