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Thursday, March 20, 2014

BNM Annual Report: Preserving macro-economic and financial stability

Published: Wednesday March 19, 2014 MYT 5:28:00 PM 
Updated: Wednesday March 19, 2014 MYT 6:29:12 PM

KUALA LUMPUR: Bank Negara Malaysia’s focus will continue to preserve macro-economic and financial stability amid the more complex and challenging environment, says its Governor Tan Sri Dr Zeti Akhtar Aziz.

She said on Wednesday this was part of Bank Negara’s move to address the risks arising from the build-up of destabilising financial imbalances, and at the same time, supporting an inclusive growth.

“While monetary policy is an important policy lever, the (central) bank has also relied on a range of policy tools to achieve these objectives. The focus of monetary policy remains on preserving price stability in an environment of sustainable growth,” she stated in the BNM Annual Report.

Zeti said Bank Negara also had to ensure the interest rate setting does not result in widespread financial distortions or excessive risk-taking behaviour in the economy.

“For sector-specific risks of financial imbalances, a specifically more targeted approach, in the form of macro-prudential and micro-rudential measures, has been implemented.

“While this broader policy tool kit has been relied upon, these measures are not a substitute for the monetary policy stance that is consistent with the prospective economic and financial conditions in the country,” she added.

Zeti pointed out that 2014 marks a year of transition for the world economy. As the recovery in the major advanced economies is sustained, the prolonged period of monetary accommodation will shift towards normalisation.

She acknowledged that challenges remain in managing this period of transition so as not to undermine the recovery. Emerging economies, in particular in Asia, have been resilient during this period of prolonged global slowdown, and will benefit from the global recovery.

As for Malaysia, she said the economic conditions had also continued to improve and the economy was expected to remain on a steady growth path going into 2014 and 2015.

As a highly open economy and an increasingly more liberalised financial system, Malaysia is significantly affected by external developments.

Despite the increased capital flow volatility during the recent months, the domestic financial markets have remained orderly, and financial intermediation has not experienced any disruptions.

Zeti pointed out the high level of international reserves, the low level of external indebtedness and the balance of payments current account surplus continue to reinforce the strength of the Malaysian economy and its capacity to cope with external shocks.

“Beyond the prevailing short-term volatility, structural adjustments and economic transformation efforts currently being implemented will strengthen the fundamentals and growth prospects over the medium term,” she said.

Zeti pointed out the domestic economy was entering a period of higher prices.

“Inflation in 2014 and 2015 is projected to be above its historical average, and to be between 3% and 4%,” she said.

The factors were revisions to a number of administered prices, higher domestic cost factors and the implementation of the Goods and Services Tax (GST) in 2015.

These were occurring at a time of modest global commodity prices, moderate domestic demand pressures and anchored inflationary expectations.

“These price adjustments are, therefore, expected to have a transitory effect on inflation. The impact of these adjustments is projected to diminish over time, and inflation is expected to stabilise in the region of its long-term average of 3%,” she said.

Zeti also said as the government continued with its ongoing plans to contain the fiscal deficit and the level of public sector indebtedness, the challenge was to achieve these fiscal sustainability efforts while remaining supportive of growth.

These fiscal reforms are essential to strengthen the overall resilience of the economy, and to increase the fiscal space to manage future unanticipated shocks, she added.

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