This article first appeared in The Edge Financial Daily on September 8, 2017 - September 14, 2017

KUALA LUMPUR: The Monetary Policy Committee of Bank Negara Malaysia (BNM) decided at its meeting yesterday to maintain the overnight policy rate (OPR) at 3%.

The decision came amid expectations of stronger-than-anticipated economic growth so far this year, driven by “a positive global growth outlook and stronger spillovers from the external sector to the domestic economy”, BNM said.

“At the current level of the OPR, the stance of monetary policy remains accommodative,” said the central bank. It however noted that the outlook may be affected by political and policy developments in major economies, as well as geopolitical risks.

BNM said domestic demand will remain as the key growth driver, supported by improving incomes and overall labour market conditions, infrastructure projects and sustained capital investment by firms that are mainly in the manufacturing and services sectors.

Additionally, BNM said headline inflation had continued its moderating trend — it declined to 3.2% in July — mainly thanks to lower domestic fuel prices. “Going forward, headline inflation is projected to moderate on expectations of a smaller effect from global cost factors.

“Underlying inflation, as measured by core inflation, will be sustained by the more robust domestic demand, but is expected to remain contained,” the statement added.

MIDF Research commented that the central bank’s decision to maintain the OPR rate was in line with expectations, as it expects domestic economy to grow moderately into the second half of 2017 (2H17).

The research house said that export growth, which was the main growth engine of the local economy in the second quarter of 2017 alongside domestic demand, is expected to slow down in 2H17 after having outpaced imports from May to July.

However, MIDF Research pointed out that the strong export growth in 1H17 was due to a low-base effect, and is expected to moderate in the remainder of the year as the high-base effect comes into play.

Additionally, MIDF said the effect of lower fuel prices, which has been reflected in the decline in headline inflation, is tapering off. “Going forward, we opine [that] Malaysia’s inflation rate will moderate as the effect of [lower] fuel prices wanes.”