Monetary Policy Statement

At its Monetary Policy Committee (MPC) meeting today, the MPC of Bank Negara Malaysia
decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.

The global economy continues to gain strength with growth being more broad based and
synchronised across regions. Global trade sustained its strong momentum. In the advanced
economies, higher wages and diminishing labour market slack remain supportive of growth.
Additional policy support, particularly in the US, is expected to lift growth further. In Asia,
growth will be driven by sustained domestic activity and strong external demand. Financial
markets continue to face intermittent volatility amid rising trade tensions. Global growth
prospects remain balanced although there are risks should trade and geopolitical tensions
worsen.

For the Malaysian economy, latest indicators point towards continued expansion in private
sector activity and exports. Going forward, the positive growth momentum is expected to be
sustained, driven by the strength in both domestic and external demand. Private consumption
will be supported by favourable income and labour market conditions. Investment activity is
projected to be sustained by implementation of ongoing infrastructure projects and capacity
expansion by firms. On the external front, exports are expected to continue benefitting from
the positive momentum in global growth and trade in advanced and regional economies.
Overall, the prospects for the Malaysian economy remain strong.

Headline inflation is expected to remain moderate for the year as a whole on expectations of a
smaller effect from global cost factors. A stronger ringgit exchange rate compared to 2017
will mitigate import costs. However, the trajectory of headline inflation will be dependent on
future global oil prices which remain highly uncertain. Underlying inflation, as measured by
core inflation, is projected to remain moderate amid stable demand conditions.

Despite financial market volatility due to external developments, domestic financial markets
have remained resilient. Malaysia’s economic fundamentals are strongly anchored. The
domestic economic outlook remains positive, the financial sector is strong and monetary and
financial conditions are supportive of economic growth in the post-election environment.

At the current level of the OPR, the degree of monetary accommodativeness is consistent
with the policy stance to ensure that the domestic economy continues on a steady growth path
amid lower inflation. The MPC will continue to monitor and assess the balance of risks
surrounding the outlook for domestic growth and inflation.

What is financial stability?

The financial system plays a critical role in the economy. It enables the financial
intermediation process which facilitates the flow of funds between savers and borrowers, thus
ensuring that financial resources are allocated efficiently towards promoting economic
growth and development.

Financial stability describes the condition where the financial intermediation process
functions smoothly and there is confidence in the operation of key financial institutions and
markets within the economy.
The importance of Financial Stability

The financial system plays a critical role in the economy. It enables the financial
intermediation process which facilitates the flow of funds between savers and borrowers, thus
ensuring that financial resources are allocated efficiently towards promoting economic
growth and development.

Financial stability describes the condition where the financial intermediation process
functions smoothly and there is confidence in the operation of key financial institutions and
markets within the economy.

Financial instability and its effects on the economy can be very costly due to its contagion or
spillover effects to other parts of the economy. Indeed, it may lead to a financial crisis with
adverse consequences for the economy. Hence, it is fundamental to have a sound, stable and
healthy financial system to support the efficient allocation of resources and distribution of
risks across the economy.

One of the main objectives of central banks is to promote and maintain monetary and
financial stability as it contributes to a healthy economy and sustainable growth. Bank Negara
Malaysia discharges the responsibility for promoting a sound and efficient Malaysian
financial system by preserving the soundness of financial institutions and the robustness of
the financial infrastructure to withstand adverse economic cycles and shocks, thereby
preventing inordinate disruptions to the intermediation process and maintaining confidence in
the financial system. This is primarily achieved through the regulation and supervision of the
licensed financial institutions, by ensuring the continued reliability of major payment and
settlement systems, and actively contributing to the development of efficient financial
markets.

The Bank also remains vigilant to new emerging trends and challenges to the Malaysian
financial system which could undermine financial stability by devoting significant resources
towards instituting robust surveillance processes which aim to identify vulnerabilities and
support pre-emptive actions to prevent systemic disturbances.

Cornerstone of Financial Stability - Supervision and Regulation

Functions of Regulation Departments

 Financial Sector Development: Progressive development of the financial sector including the
promotion of competitive and robust financial institutions (FIs) and financial infrastructure
enhancement
 Financial Surveillance: Comprehensive and integrated macro-prudential surveillance and
assessments of emerging trends and vulnerabilities of the financial system
 Prudential Financial Policy: Development of a sound & robust prudential framework for FIs
that promotes harmonisation & alignment across sectors
 Consumer & Market Conduct: Formulates and enforces market conduct policies to ensure
fair treatment of financial consumers as well as undertakes initiatives to increase the
financial literacy levels of Malaysian consumers.
  Islamic Banking and Takaful: Create an enabling environment through improvements in the
regulatory regime and develop relevant prudential policies to effectively support an Islamic
financial system
 Development Finance and Enterprise: Promote the roles of development financial
institutions in effectively and efficiently delivering its mandated roles of promoting strategic
sectors of the economy. Drive, incentivise and influence financial services providers to
provide financing to strategic targeted sectors and the underserved stakeholders
 MIFC Promotion Unit: Develop and implement a comprehensive range of MIFC promotional
strategies and initiatives to position Malaysia as an international Islamic financial hub.

Functions of Supervision Departments

 Financial Conglomerates Supervision: Supervision of domestic financial conglomerates and

Islamic banks which are part of the domestic banking groups.
 Banking Supervision: Supervision of foreign banks, stand-alone investment banks, stand-
alone and foreign licensed Islamic banks, and development financial institutions.
 Insurance and Takaful Supervision: Supervision of insurance companies, reinsurance
companies, takaful operators, retakaful operators as well as international takaful operators
 Payment Systems Policy: Development of policies and strategies to promote the safety,
security & efficiency of payment systems & payment instruments, and drive migration to e-
payment initiatives.
 Specialist Risk Unit: Provide prompt independent assessment and advice on emerging risks
in specific and across regulated financial institutions to facilitate pre-emptive actions.

Functions of Regulation and Supervision Administration

 Provide centralised administration services, knowledge management support and

coordinate learning/development initiatives for both regulation and supervision
departments.

Legislation

To enable the Bank to meet the objectives of a central bank, it is vested with comprehensive
legal powers under the following legislation to regulate and supervise the financial system.
These pieces of legislation includes:

Central Bank of Malaysia Act 2009

An Act to provide for the continued existence of the Central Bank of Malaysia and for the
administration, objects, functions and powers of the Bank, for consequential or incidental
matters.

Incorporating Latest Amendments up to Act A1443/2013 cif 8 Feb 2013

[*Note: Section 61 to Section 66 of Part VIII of this Act have not come into force yet. In this regard, Part III of the repealed
Central Bank of Malaysia Act 1958 (Revised-1994) [Act 519] on currency containing Section 18 to Section 27A are still in
force notwithstanding the repeal of that Act]

Central Bank of Malaysia Act 1958 (Revised-1994) [Repealed, except for Part III]

An Act to provide for the establishment, administration, powers and duties of a Central Bank
of Malaysia.

*Note: This Act has been repealed by the Central Bank of Malaysia Act 2009 [Act 701]
except for Part III on Currency (containing section 18 to section 27A) which continues to be
in force notwithstanding the repeal of the Act.

Financial Services Act 2013

An Act to provide for the regulation and supervision of financial institutions, payment
systems and other relevant entities and the oversight of the money market and foreign
exchange market to promote financial stability and for related, consequential or incidental
matters.

Date come into force: 30 June 2013, except section 129 and Schedule 9, see [P.U.(B) 276/2013]

Islamic Financial Services Act 2013

An Act to provide for the regulation and supervision of Islamic financial institutions,
payment systems and other relevant entities and the oversight of the Islamic money market
and Islamic foreign exchange market to promote financial stability and compliance with
Shariah and for related, consequential or incidental matters.

Date come into force: 30 June 2013, except paragraphs 1 to 10 of Schedule 9 and paragraphs 13 to 19 of Schedule 9, see
[P.U.(B) 277/2013]

Insurance Act 1996

An Act to provide new laws for the licensing and regulation of insurance business, insurance
broking business, adjusting business and financial advisory business and for other related
purposes. Incorporating Latest Amendments up to Act A1247/2005 - cif : 1 Jan. 1997

* Note: This act has been repealed except section 147(4), 147(5), 150, 151, 144 and 224 shall
continue to remain in full force and effect, see section 275 of FSA 2013 - Act 758
Development Financial Institutions Act 2002 (Act 618)

The DFIA which came into force on 15 February 2002 focuses on promoting the
development of effective and efficient development financial institutions (DFIs) to ensure
that the roles, objectives and activities of the DFIs are consistent with the Government
policies and that the mandated roles are effectively and efficiently implemented. DFIA also
emphasises on efficient management and effective corporate governance, provides a
comprehensive supervision mechanism and mechanism to strengthen the financial position of
DFIs through the specification of prudential requirements.

Incorporating Latest Amendments:

Act A1502/2015
cif : 31 January 2016
gazetted: 26 November 2015

PU(A) 14/2016
cif : 31 January 2016
gazetted: 28 January 2016

Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act

2001 (Act 613)

The AMLATFPUAA provides for the offence of money laundering, the measures to be taken
for the prevention of money laundering and terrorism financing offences, investigation
powers and the forfeiture of property involved in or derived from money laundering and
terrorism financing offences, as well as terrorist property, proceeds of an unlawful activity
and instrumentalities of an offence. The First Schedule of the AMLATFPUAA contains a list
of the reporting institutions under the AMLATFPUAA i.e. financial institutions and
designated non-financial businesses and professions which are required to perform certain
obligations which are designed to prevent money laundering and terrorism financing
offences. The Second Schedule of the AMLATFPUAA lists serious offences from various
legislation, which if committed, are likely to result in a person benefitting or deriving
proceeds from the offence.

The AMLATFPUAA promotes a collaborative and multi-agency approach by setting out the
powers and functions of:

a. the competent authority which is responsible to oversee the performance of obligations by

the reporting institutions, facilitate the enforcement of the AMLATFPUAA and co-operate
with the foreign financial intelligence units;
b. enforcement agencies which are responsible to investigate the offences under the
AMLATFPUAA; and
c. supervisory and regulatory authorities which are responsible to facilitate in the
implementation of the AMLATFPUAA.
The Minister of Finance has appointed BNM as the competent authority under the
AMLATFPUAA. The Financial Intelligence and Enforcement Department of BNM is
responsible to perform BNM's functions as the competent authority under the
AMLATFPUAA

Incorporating Latest Amendments:

PU(A) 423/2017
cif : 2 Jan 2018
gazetted: 28 Dec 2017

Money Services Business Act 2011

The Money Services Business Act 2011 (MSBA) provides for the licensing, regulation and
supervision of the money services business comprising money changing, remittance and
wholesale currency businesses. The MSBA was enacted with the aims to modernize and