Malaysia’s economy started well in 3Q2024, supported by robust external demand and continued recovery in tourism. Exports sustained double-digit growth in August, aligning with an upward trend in the Industrial Production Index. Despite concerns regarding slower economic growth in China, one of Malaysia’s key trading partners, the recent rate cuts and additional fiscal stimulus in China are expected to underpin Malaysia’s external demand. Given these positive trends, Malaysia is well-positioned to meet our 2024 gross domestic product growth forecast of 4.8%.

The optimism towards Malaysia’s economy is mirrored in the financial markets, with net foreign inflows continuing in August at RM11.5 billion (July: RM9.1 billion), bringing the year-to-date (YTD) total to RM20.8 billion. This strong performance, contrasting with the muted inflows seen in 1H2024, is expected to persist amid global monetary easing. As at September 25, the ringgit appreciated by 5.1% YTD, positioning itself as Asia’s top-performing currency, bolstered by the surge in foreign inflows. This influx has buoyed the local bond market, with Malaysian Government Securities sustaining their rally throughout September.

Following the Federal Reserve’s first rate cut since 2020 at 50 basis points (bps) — larger than the typical 25 bps — the broad bond markets rallied on expectations of US rate cuts. Yields continued to decline in September, bull-steepening and pulling the yield curve out of inversion, a trend observed in other bond markets such as in the UK gilts. The US rate cut came in response to deteriorating employment data, while inflation appears to have peaked, with the personal consumption expenditures price index remaining at 2.5% in August (July: 2.5%). Should this trend continue, further US rate cuts are expected, which would maintain the recent strength of the ringgit.

Similarly, the European Central Bank is continuing its path of rate cuts, having reduced its rate for the second time in September, supported by easing inflation and the need to stimulate tepid economic growth. The overall disinflation trend has contributed to domestic inflation, which eased to 1.9% in August. We project inflation to remain within the lower end of the official forecast, allowing Bank Negara Malaysia to maintain its overnight policy rate at 3.0%.