Malaysia Decision Guide: Deflation Sets Up Another Dovish Tilt

(Bloomberg) -- Malaysia’s central bank could be the next to steer toward an easing bias amid the onset of deflation and an expected slowing economy.

While Bank Negara Malaysia is likely to hold interest rates on Tuesday, it faces pressure to ease policy as disinflation looms over Southeast Asia. After being the first in the region to tighten in January 2018, the monetary authority has held its overnight rate steady at 3.25 percent since then. Analysts at banks including Deutsche Bank AG and Nomura Holdings Inc. expect a cut in 2019.

“We don’t think deflation will be the principle driver of looser policy -- the bank has tended to look through temporary swings in inflation in the past,” said Alex Holmes, an economist at Capital Economics Ltd. in Singapore. “But the lack of any significant price pressures certainly gives BNM the space its needs to cut.”

Malaysia Decision Guide: Deflation Sets Up Another Dovish Tilt

Here’s what to expect in the policy statement that’s scheduled for release at 3 p.m. in Kuala Lumpur:

Sliding Prices

Falling fuel costs pushed the economy into deflation in January for the first time since 2009, with consumer prices dropping 0.7 percent from a year earlier.

Finance Minister Lim Guan Eng has said the decline is due to lower oil prices and tax changes, rather than weakening demand, and therefore can’t be compared to the deflationary period a decade ago in the aftermath of the global financial crisis. He is also seeking to ensure falling prices translate to lower costs of living for ordinary Malaysians, who haven’t felt the decrease in their wallets.

At its last policy meeting in January, the central bank said inflation will trend higher in 2019 as the effect of last year’s scrapping of a consumption tax wanes.

Softer Growth

Analysts aren’t so optimistic on economic growth. They doubt Malaysia will meet its target of 4.9 percent this year, with a survey of 34 economists last month showing expectations of just 4.5 percent. That compares with the 4.7 percent expansion seen in 2018.

The government is almost done with reviewing public projects and cutting spending as it seeks to rein in the budget deficit, and will push for state investment to boost growth, Finance Minister Lim said last month.

While manufacturing and export growth in Malaysia are holding up for now, purchasing managers’ surveys signal a downturn as global demand weakens and trade tensions persist.

“Malaysia’s economic growth has been weakening and indicators in recent months suggest a further weakening in momentum,” said Vaninder Singh, an economist at Deutsche Bank in Singapore, who expects the central bank to cut rates in the second half of the year.

“With fiscal constraints still in place, and private consumption and investments slowing, the only stimulus available at this stage is monetary.”

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