At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to leave the Overnight Policy Rate (OPR) unchanged at 3.50 percent.

Since the last MPC in August, the global economic situation has deteriorated considerably and the international financial turmoil has yet to stabilise. The greater focus of policymakers is now towards restoring the functioning of the international financial markets and towards avoiding a sharp global economic downturn. While the downside risks to global growth have increased significantly, concerns about inflation have subsided as commodity and energy prices declined, and as slower growth sets in.

While the Malaysian financial markets have been affected by these global developments, there is ample liquidity in the domestic financial system and there has been normal functioning of the financial markets. The banking institutions are operating with strong capital and liquidity buffers, and have continued to provide financing to the economy.

The current elevated inflation rate reflects the effects of the fuel and other administered price adjustments made earlier this year. However, the assessment is that inflation has now peaked and is expected to moderate into 2009. An increasing number of indicators now signal an easing of inflationary pressures. Lower cost pressures and moderating domestic demand are expected to reduce inflation in 2009. The slower global growth and the decline in commodity prices will affect the performance of the export sector and consequently, the overall economic growth in 2009.

Malaysia is entering this challenging period from a position of strength following several years of steady growth, reinforced by the current account surplus, the strong reserves position, low level of external indebtedness, and a well-capitalised banking system. In the face of diminishing inflationary pressures, and in the event of heightened downside risks to growth, the Bank will take swift monetary policy action to provide support to the economy.