Monetary and financial developments February 2011

Price Conditions: Headline inflation, as measured by the Consumer Price Index (CPI), increased to 2.9% on an annual basis in February. This reflected mainly the higher global commodity and energy prices, which were translated into higher underlying inflation in the region and domestically, particularly for the food and fuel components. For Malaysia, the rise in food prices in February was also due to supply and adverse weather conditions during the Chinese New Year festivities. Subsequently, higher inflation was recorded in the food at home and food away from home sub-categories due to the increase in the price of  meat and  vegetables. Inflation in the transport category was higher during the month reflecting the adjustment in the price of RON97 petrol from RM2.40/litre to RM2.50/litre. Notably, inflation in both the recreation services and culture and clothing and footwear categories recorded an uptrend. The recreation services and culture category recorded higher inflation due mainly to the increase in the prices of gardening equipment, plants and flowers. Meanwhile, the increase in inflation in the clothing and footwear category was a result of higher global cotton prices.

Monetary Conditions:  Interbank rates were stable in February. In terms of retail rates, the average base lending rate (BLR) of commercial banks was unchanged at 6.27% as at the end of the month. Retail deposit rates were also stable. Broad money (M3) expanded at a more moderate annual rate of 7.9% in February. During the month, the expansionary effects of higher credit extension by the banking system to the private sector and net foreign inflows were offset by the fund raising activities of the Government. Meanwhile, narrow money (M1) also expanded at a more moderate pace in February due to the return of currency to the banking system after the Chinese New Year festivities. Net financing to the private sector increased by RM13.4 billion in February on a month-on-month basis, driven by higher PDS issuances. PDS issuances rose due to several large issuances mainly for refinancing and working capital. Loans outstanding and other major loan indicators, however, moderated compared to the previous month as there were fewer working days due to the Chinese New Year holidays.

Banking System: The banking system remained well-capitalised, with the risk-weighted capital ratio (RWCR) and core capital ratio (CCR) at 14.3% and 12.6% respectively. The level of net impaired loans remained stable, accounting for 2.3% of net loans. Loan loss coverage was sustained at 90.5%.

Exchange Rates and International Reserves: In February, the ringgit exhibited a mixed performance against the currencies of Malaysia’s major trade partners. The ringgit appreciated against the US dollar on continued optimism about the growth outlook for Asia, which strengthened investor sentiments towards regional financial markets. In March, the ringgit appreciated against the currencies of all of Malaysia’s major trading partners, with the exception of the euro. The international reserves of Bank Negara Malaysia stood at RM340.6 billion (equivalent to USD110.4 billion) as at 15 March 2011, sufficient to finance 8.9 months of retained imports and is 4.3 times the short-term external debt.