KUALA LUMPUR (March 20): Bank Negara Malaysia (BNM) has pledged a monetary policy stance supportive of the economy, even as the central bank flagged potential risks to inflation and growth as the government tightened its budget for subsidies.

Rationalisation of subsidies and price controls would lead to higher relative prices for energy and food, BNM said in the Economic and Monetary Review 2023 report released on Wednesday. Growth could also come under pressure, though the impact could be softened by cash handouts, it noted.

“We will need to carefully assess the effects of subsidy rationalisation on the pervasiveness and persistence of price increases, as well as its implications for growth,” the central bank stressed.

Malaysia’s overnight policy rate has remained unchanged for 10 months, and was last raised in May 2023 by 25 basis points, closing a cycle of what had been called “normalisation” by the central bank.

Earlier this month, BNM kept the benchmark rate at 3% as widely expected in the second of six reviews scheduled for this year, citing improving economic growth and moderating inflation.

BNM noted that it is crucial to differentiate between short-term impacts and potential longer-term effects on inflation and growth when it comes to supply shocks, such as those linked to subsidy rationalisation.

Transitory changes in prices which are likely to normalise over “a reasonable period of time” may not justify a monetary policy response, while “noticeably pervasive and persistent” price increases may require an action to ensure that the medium-term prospects are not threatened, BNM said.

“It could also happen when signs emerge of inflation expectations becoming de-anchored, risking a wage-price spiral, or when cash assistance that comes with supply shocks is expected to lead to excessive demand,” BNM said.

If not tackled, the accelerating inflation in these instances will create more uncertainty and further erode purchasing power, subsequently affecting consumption and investment growth, BNM emphasised.

Growth of the third-largest Southeast Asian economy, meanwhile, faces external risks as well as possibly more severe shocks on domestic commodity production due to adverse weather events and prolonged field maintenance, which could weigh on the outlook, BNM flagged.

Broadly, BNM’s Monetary Policy Committee aims to ensure a monetary policy stance that is “supportive of the economy and consistent with the current assessment of the inflation and growth prospects” amid potential domestic policy changes and a challenging external environment.

“Given the degree of uncertainty”, the committee remains “vigilant of ongoing developments and their implications for the balance of risks surrounding domestic inflation and growth”, BNM added.