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 previous MPC meeting, the global economy has weakened further with growing evidence of a deterioration of economic performance across a number of the developed economies. This has been the outcome of financial stress, tight credit conditions, asset market weakness and the impact of higher energy and commodity prices. There are also now signs of moderating growth in several emerging economies.

The Malaysian economy has been affected by these developments. Although the export sector has benefited from the high energy and commodity prices, the slower global growth is expected to exert a moderating impact on exports. In addition, domestic demand is being affected by the deflationary impact of higher energy and food prices, the softening labour market conditions, and the more challenging business environment.

Domestic inflation is expected to remain high for the remaining part of 2008 and going into early 2009, primarily reflecting the first-round effects of the adjustments in energy prices, and the higher commodity and food prices. Indicators such as the Producer Price Index continue to show that businesses are still facing rising operating costs. However, competitive pressures and slowing demand are likely to contain the pass-through to consumer prices. The recent decline in commodity prices is also likely to ease these cost pressures. Overall, the weaker economic conditions will reduce the likelihood of second-round effects that will generate persistent inflationary trends. The assessment is therefore that inflation is expected to moderate substantially in the second-half of 2009.

Consequently, the Bank maintains the assessment that with the expected moderation in inflation in the medium term, the greater priority is to avoid a fundamental downturn in economic activity. The current level of the OPR is consistent with this outlook. Going forward, the Bank will maintain its focus on the medium term outlook for inflation and growth, and will carefully assess global and domestic developments in setting the stance of monetary policy.