INFLATION risks have risen from price adjustments, but Bank Negara Malaysia head has assured that the monetary policy will see to it that the Consumer Price Index (CPI) trends to the average three per cent level in 2016.
Apart from inflation, growth also remains a risk, warned governor Tan Sri Dr Zeti Akhtar Aziz.
“Right now our assessment is that the economy will remain on a steady growth path,” she said yesterday after launching the central bank’s latest exhibition — Knowing Nusantara: Money That Made the Region.
Activities in the trade sector have improved on the back of an improved external environment while the private sector has also been supportive with strong investment activities, contributing to growth in the gross domestic product.
The second quarter posted a strong 6.4 per cent annualised growth from a 6.2 per cent growth in the first quarter.
As to whether the interest rate is at an appropriate level, Zeti stressed the environment remains very dynamic, necessitating periodic assessments on the prospective risks to growth and inflation and potential “destabilising” financial imbalances.
The monetary policy committee raised the overnight policy rate by 25 basis points on July 10 and the market is split in its views that another hike of 25 basis points should also take place at either the September 18 or November 6 meetings.
The CPI registered a 3.2 per cent growth in July, an indication that it has stabilised after the effects of the subsidy reforms last year.
“These are price adjustments, which will lead to temporary increases to inflation, but we expect in 2016 inflation will begin to trend to our long-term average of three per cent ... this is what the policy will focus on.”
On the need to anchor inflation expectations ahead of the Goods and Services Tax in April next year, Zeti said there should be better understanding about the effects of the consumption-based tax and its temporary nature.
On the option of the statutory reserve requirement (SRR) ratio used to check on the liquidity level in the banking system, Zeti said the financial system does not have an excess liquidity situation, which will result in excess credit growth.
“Right now, we are managing the liquidity through open market operations to ensure liquidity is ample,” she said.
Zeti also reiterated that the central bank has an extensive tool kit, which is important for Malaysia, on the threshold of maturing into a bigger financial system.
“The tools at our disposal are not only for the interest rate and SRR, but also prudential measures and others, so that we can ensure stability in our system.”
On the ringgit, she said volatility will continue against a backdrop of significant uncertainty in the global environment and in the international financial system.
