Source: Malaymail Online

KUALA LUMPUR, March 11 — The policy flexibility to strengthen domestic buffers and resilience to tolerate larger and more volatile capital flows have become important, says Bank Negara Malaysia (BNM).

“Policy flexibility, including the ability to use micro- and macroprudential tools, has been important in managing the risks associated with such capital flows,” it said in its 2014 Annual Report released today.

These measures are vital to ensure that such capital flow volatility and the corresponding fluctuations in the domestic financial markets and exchange rates do not spill over into the real economy, it said.

BNM said strong domestic fundamentals, greater exchange rate flexibility, adequate levels of international reserves, deeper and more diversified financial markets and a strong banking system were crucial to Malaysia’s resilience.

The central bank said uneven growth and divergence in monetary policies across major economies and uncertain oil prices would cause shifts in global liquidity flows and heightened volatility in financial markets and currencies.

The central bank said global financial markets experienced greater volatility towards the end of 2014, amid concerns of global growth and the sharp decline in commodity prices.

“The prices of oil and most other commodities have been falling since June as the rising global supply of these commodities exceeded the slowing demand,” it said.

However, the further decline in oil prices since November 28 shifted the focus of global investors to the potential impact on major commodity exporting countries, particularly on their fiscal and external positions.

As a result, the ringgit exchange rate was influenced by both domestic and external factors.

For the year as a whole, the ringgit depreciated 6.1 per cent to end the year at RM3.4950 against the US dollar.

However, it remained relatively stable with a depreciation of only 0.6 per cent against the currencies of major trading partners.

BNM said interest rates rose in 2014 following the Monetary Policy Committee’s decision to raise the Overnight Policy Rate (OPR) by 25 basis points in July 2014.

The central bank pointed out that Malaysian Government Securities yield curve flattened during the year but the private debt securities market yields was broadly higher, reflecting the change in the OPR.

“PDS yields remained supportive of private sector financing,” it said.

Towards year-end, sentiment in the domestic equity market were also affected by the sharp decline in oil prices.

The oil and gas sector was particularly affected amid concerns that lower oil prices would lead to lower corporate earnings and investments.

The FTSE Bursa Malaysia Kuala Lumpur Composite Index declined 11.6 per cent from its peak to reach its lowest level for the year at 1,673.9 points on December 16.

For the year, the FBM KLCI declined 5.7 per cent to close at 1,761.3 points.

As at end-December 2014, the FTSE Bursa Malaysia’s market capitalisation stood at RM1.65 trillion versus RM1.70 trillion in 2013. — Bernama