Chapter 1: Economic, Monetary and Financial Developments in 2024

Headline inflation moderated in 2024, averaging at 1.8%, below its historical average (2011–19 average: 2.2%). In the environment of contained cost conditions and stable demand, inflation was moderate across most Consumer Price Index (CPI) segments. Of note, the moderation could be seen most prominently in food and non-alcoholic beverages (2024: 2%; 2023: 4.8%) and restaurants and hotels (2024: 3.1%; 2023: 5.6%) (Chart 1.13). Nevertheless, the broad moderation was partly offset by pockets of price pressures from policy adjustments, including higher water tariff rates, an increase in the service tax rate for selected CPI segments and the implementation of targeted subsidies for diesel. However, the overall impact of these policy adjustments was manageable given effective mitigating efforts. In the case of targeted diesel subsidies, the continued provision of subsidised diesel to major commercial users, such as those in the logistics sector, under the Subsidised Diesel Control System (SKDS) 2.0, limited the cost impact on businesses. This was coupled with strict enforcement by authorities aimed at curbing profiteering activities by businesses. These actions helped contain spillovers to broader CPI prices. Additionally, non-commercial diesel users in Sabah and Sarawak were exempted from the subsidy rationalisation and continued to pay the lower price of RM2.15/litre. All these measures resulted in a modest direct impact on headline inflation.

Underlying inflation, as measured by core inflation, moderated below its historical average to 1.8% for the year (2023: 3%; 2011–19 average: 2%). Although domestic demand strengthened during 2024, private consumption growth remained below its long-term average (2024: 5.1%; 2023: 4.7%; 2011–19 average: 7.1%). This suggested that demand conditions remained moderate and not overly strong. In terms of components, the continued moderation in food away from home inflation (2024: 3.6%; 2023: 6.7%) was a key driver of lower core inflation. Price pressures were broadly less pervasive during the year, notwithstanding intermittent periods of higher pervasiveness which reflected seasonal factors. Overall, the share of CPI items recording monthly price increases trended lower for most of the year and remained below the long-term average (2024: 43%; 2023: 43.9%; 2011–19 average: 47.7%) (Chart 1.14).

In the first half of 2024, there was a slight increase in production costs, as reflected by a 1% increase in the Producer Price Index (PPI) (2023: -1.9%). This was mainly attributable to sustained US dollar strength against the ringgit, higher freight cost as well as higher prices of beverage commodities, agricultural raw materials, and metals. The extent of exchange rate pass-through to consumer prices was partially mitigated by existing price controls and subsidies on key expenditure items such as retail fuel, as well as relatively stable pricing behaviour among firms. Around mid-year, as the ringgit strengthened and freight costs began to decline, production costs trended lower. Although the ringgit pared some of these gains towards the end of 2024, the earlier improvements in supply chain conditions and ringgit stabilisation contributed to an overall decline in production costs, as evidenced by a 0.5% decline in the PPI in the second half of 2024. Overall, PPI increased by 0.3% in 2024.

Monetary policy remained unchanged amid the outlook of a stronger domestic economy and modest inflation

During the year, the Monetary Policy Committee (MPC) decided to maintain the Overnight Policy Rate (OPR) at 3.00%, with the focus of ensuring price stability conducive to the sustainable growth of the economy. In 2024, the Malaysian economy continued to be strong, underpinned mainly by robust domestic demand, following improved household spending and expansion in investment activity. Furthermore, exports activity had also benefitted from the global technology upcycle and continued strength in nonE&E goods. Against a backdrop of external developments and domestic policy adjustments, the MPC continued to remain vigilant on potential spillovers to inflation and growth.

Throughout the year, the MPC focused on assessing the potential impact of supply shocks arising from both external developments, such as global supply chain disruptions early in the year, and domestic policy reforms. As a tool to manage demand conditions, the role of monetary policy in containing cost pressures and addressing supply shocks is less direct. In this regard, the MPC carefully considered the short-term and long-term effects of these shocks. This included the assessment on inflation persistence and pervasiveness, as well as the impact on the broader economy. Overall, the assessment pointed to a limited impact of supply shocks on inflation in 2024. The impact of diesel price subsidy rationalisation in June 2024 on inflationary pressures was assessed to be contained due to effective mitigation measures by the Government to minimise the cost impact on businesses. Additionally, cost pressures from external developments early in the year moderated. This was due mainly to declining commodity prices, improvement in external supply chain conditions and the ringgit’s appreciation against major currencies. As such, the MPC looked through these supply shocks and kept the OPR unchanged for the year. Further, the MPC assessed that domestic demand was not excessive, as indicated by private consumption growth remaining below its longterm trend. Overall, the monetary policy stance was consistent with the outlook of the Malaysian economy.

In line with unchanged monetary policy throughout the year, domestic monetary conditions remained conducive to the economy. Overall banking system liquidity continued to facilitate financial intermediation amid higher interbank trading activity, supported by BNM’s monetary operations including liquidity injections via reverse repos and foreign exchange swaps. As at end-December 2024, total banking system liquidity stood at RM107.5 billion (2023: RM147.7 billion) (Chart 1.15). At the institutional level, most banking institutions maintained surplus overnight placements with BNM.

Interbank rates remained broadly stable in 2024, despite some bouts of fluctuation in selected markets. This was indicated by the 3-month Kuala Lumpur Interbank Offered Rate (KLIBOR) generally prevailing in the range of 3.53% to 3.59%, albeit with some seasonal movements due to the effects of year-end deposit competition. In the fourth quarter, the 3M KLIBOR edged upwards as banks, as a precaution, competed for funding to shore up liquidity positions and strengthen regulatory ratios.

Amid stable interbank conditions, banks’ cost of funds eased slightly during the year, in line with their continued strategy to manage funding costs by adjusting retail board fixed deposit (FD) rates. The easing was also due, in part, to a decline in banks’ cost of foreign currency borrowings in the second half of 2024, amid the global monetary policy easing, especially following the sharp cut in the Fed’s policy rate.

These developments in interbank and funding conditions contributed to broadly stable lending rates. Lending rates, as indicated by the weighted average lending rate (ALR) on outstanding loans, were broadly stable following the MPC’s decision to keep the OPR unchanged at 3.00% throughout the year (Chart 1.16). Lending rates on new loans for home purchases eased slightly, owing to stronger competition between banks.

Continued flow of credit to the private non-financial sector

In line with stronger domestic economic activity, credit to the private non-financial sector grew by 5.2% (2023: 4.8%) (Chart 1.17). This increase in credit growth was driven mainly by higher growth in outstanding loans (5.6%; 2023: 5.0%), particularly for businesses amid a sustained household loan growth, while corporate bonds recorded a more subdued growth in 2024 (3.4%; 2023: 4.2%).

Households remained the major borrower segment contributing to loan growth in 2024, with a sustained growth in outstanding household loans of 5.9% (2023: 5.6%), particularly for the purchases of houses and cars (Chart 1.18). Continued labour market improvements, as reflected by higher employment and income growth, provided impetus to household credit demand. Households’ repayment capacity remained intact, while the share of household borrowers with repayment assistance continued to be small and on a decline.

Outstanding business loans recorded higher growth (5.1%; 2023: 3.7%) (Chart 1.19), driven mainly by an increase in loans for investment-related purposes. The improvement in investment-related loans reflected the increase in private sector investment activities amid the positive economic and business outlook. In particular, this was more notable in sectors such as ICT and E&E. Large-scale public investment initiatives such as the NETR and the NIMP also contributed to spurring a stronger investment appetite among businesses, supporting the demand for financing. The pick-up in investment-related loans was more pronounced for SME borrowers, which continued to record a strong overall loan growth in 2024. Loan growth for non-SMEs, on the other hand, improved slightly compared to the previous year. Nevertheless, it remained below the long-term average, driven in part by large firms’ preference to use alternative sources of financing, such as capital markets, retained earnings and intercompany loans.

Overall, financing conditions remained supportive of household and business needs. Loan approval rates remained stable in 2024, with banks maintaining prudent lending standards. Banks continued to provide repayment assistance for borrowers who faced difficulties servicing their debt obligations, while various debt advisory and management arrangements including those under Credit Counselling and Debt Management Agency (AKPK) remained in place. Financial measures, such as credit guarantees and BNM’s various financing facilities, also provided targeted support to segments in need, such as SMEs, which ensured uninterrupted intermediation of credit to support the economy.