Monetary and Financial Developments in March 2021

Headline inflation increased to 1.7% in March

• Headline inflation increased to 1.7% in March (February: 0.1%).
• The main contribution to the higher headline inflation was the base effect from low domestic retail fuel prices in the corresponding period last year
  (RON95 petrol prices: March 2021: RM 2.05/ litre; March 2020: RM 1.74/litre). This base effect is expected to remain in the second quarter of 2021 and dissipate thereafter.
• Underlying inflation, as measured by core inflation, remained stable at 0.7%.

Higher IPI in February driven by manufacturing

• Overall IPI improved slightly in February to 1.5% (January: 1.2%), as higher manufacturing production more than offset further contraction in the mining production and electricity generation.
• The E&E industry recorded double-digit growth of 10.3% (January: 7.9%) driven by global demand from the tech-upcycle. Manufacturing activity was also supported by the healthcare segment, namely from rubber-based and pharmaceutical products.

Continued growth in net financing

• Net financing expanded at 4.5% reflecting the increase in outstanding corporate bond growth (March: 5.9%, February: 4.5%) and outstanding loan growth (March: 3.9%, February: 3.7%).
• Outstanding household loan growth increased to 5.7% (February: 5.1%). Higher loan disbursements were recorded for the purchase of cars and residential properties.
• For businesses, outstanding loans grew at 1.1% (February: 1.0%). During the month, higher loan disbursements and repayments were observed across most sectors and purposes.

Domestic financial markets were affected mainly by external developments

• In March, domestic financial markets were affected by external factors, particularly the rise in long-term US Treasury yields, which reached its highest level for the year at the end of the month amid higher growth and inflation expectations in the US.
• Consequently, the US dollar also strengthened which led to a broad-based weakening of other advanced and emerging market currencies against the US dollar. During the month, the ringgit depreciated by 2.6% against the US dollar while the 10-year MGS yield increased by 18.3 basis points.
• The FBM KLCI declined marginally by 0.3% as bond yields surged and investor sentiments were affected by lingering uncertainties surrounding the path of the pandemic globally and expectations for a faster US monetary policy tightening.

Ample liquidity in the banking system amid stable funding conditions

• Banking system continued to maintain healthy liquidity buffers with the liquidity coverage ratio (LCR) remaining strong in March 2021 (February: 147.1%).
• Banks’ funding profile also remained stable amid sustained strong growth in retail deposits.

Sound risk management practices by banks will support asset quality in the period ahead

• Overall gross and net impaired loans ratios were broadly sustained at 1.6% and 1.0%, respectively.
• Banks continued to set aside additional provisions against potential credit losses, which currently stand at 1.8% of total banking system loans.