An overview of the effects of monetary policy in Malaysia on GDP and inflation, from 1981 to the present day.
% annual growth rate:
Sources: M3 from Bank Negara Malaysia and nominal GDP from IMF database, as at September 2023
The medium-term relationship between money and nominal GDP growth in Malaysia, 1981-2022
Five-year moving averages of annual % changes, with 1983 being the start of the first five-year period
Comment on monetary trends in Malaysia
The Federation of Malaysia came into existence in 1963. Initially, it included Singapore among its members, but it left in 1965, becoming an independent country. The former British colony of Malaya had developed a strong export-driven economy early in the 20th century, with tin and rubber being the principal commodities. Since independence, Malaysia's economy has diversified. Since the 1980s. industry has been the primary driver of growth and the country is now far less dependent on mining and agriculture. A substantial services sector has also developed. GDP grew particularly rapidly in the late 1980s and early 1990s, accompanied by high levels of broad money growth.
The central bank, Bank Negara Malaysia, began life as the Central Bank of Malaya in 1959 when the country was still under British rule. When it became independent, Malaysia shared a common currency, the dollar, with Singapore, North Borneo and Brunei. This currency was part of the Sterling area. The new Malaysian dollar, introduced in 1967, remained exchangeable at par with the currencies of Singapore and Brunei until 1973 when the Malaysian government withdrew from this arrangement. In 1993, Malaysia began to call its currency the ringgit rather than the dollar, but the change of name was merely cosmetic. It was - and is - essentially the same currency as before.
Between 1995 and 1997, the ringgit floated freely but like other countries in the region, Malaysia was affected by the 1997 Asian financial crisis, although to a lesser degree than its near neighbours Thailand and Indonesia. It refused aid packages from the IMF and the World Bank but did adopt a peg to the US dollar which lasted until 2005.
The central bank is responsible for maintaining price stability while remaining supportive of growth. Its track record has been good. Inflation has not risen above 10% at any time in the last 25 years and GDP has grown steadily since the late 1990s apart from a blip in 2008-9. Unlike many central banks, Bank Negara Malaysia has not adopted formal inflation targeting although its more flexible approach to monetary policy, which it calls "inflation anchoring" is nonetheless designed to keep inflation low and stable. In 2020, the economy contracted by 5.6% as a result of the coronavirus pandemic. Inflation dropped below zero and money growth picked up as the banks and central bank financed a 250m. ringgit stimulus package. This was a fairly modest response compared to many advanced western nations. Broad money growth did rise, but only from 2.7% in 2019 to 4.9% a year later.
Consequently, Malaysia saw only a modest spike in inflation and by 2023, it had returned to levels around 2%. Malaysia has recovered well from the pandemic without having to resort to sharp increases in interest rates thanks to the restrained broad money growth in 2020 and 2021 compared with many other countries.