KUALA LUMPUR: The Malaysian economy is not in a crisis and its growth trajectory remains positive, but the country needs to reform to become an innovation-based economy, said Bank Negara Malaysia (BNM).

Governor Tan Sri Nor Shamsiah Mohd Yunus said the fundamentals of the economy and financial system are strong and pre-emptive policy measures have been taken to help weather the challenging external environment.

"These are important facts on the economy and as Malaysians, it is important that we act in a manner that does not jeopardise the recovery and the confidence of investors, which in turn can create a negative self-fulfilling cycle," she said in her feature address at the Khazanah Megatrends Forum 2022 today.

In her speech titled "Navigating Malaysia's Economic Transition in a Post-COVID World", Nor Shamsiah said the country's economic recovery is well underway and growth this year is expected to be strong.

Inflation is expected to peak in the third quarter of this year, she said, noting that it is largely supply-driven but also due to stronger demand with the reopening of the economy.

"The extent of upward pressures to inflation will remain partly contained by existing price controls and the prevailing spare capacity in the economy," she added.

She noted that the outlook next year will be more challenging due to a confluence of factors, namely rising geopolitical tensions and conflict, global inflationary pressures and extremely volatile financial markets.

"All these will lead to slower growth next year," she said.

Comparing the current situation to the recent pandemic and the Asian Financial Crisis, the governor said the Malaysian economy is clearly on a stronger footing today based on the strong growth momentum, lower unemployment rate, well-capitalised financial institutions, and a more diversified economy.

This has led the Monetary Policy Committee to gradually adjust the overnight policy rate (OPR) in May, July and September this year, she said.

According to her, the MPC is not constrained by a pre-determined path for the OPR and adjustments to the key interest rate will be done in a gradual and measured manner.

Nevertheless, she said, keeping rates too low for too long can, as seen in other countries, lead to distortions and imbalances, fuel inflationary pressures and weaken their currencies.

Nor Shamsiah pointed out that Malaysia needs to put in place reforms that completely transform the economy once again to secure a more sustainable and prosperous future in the face of future challenges and uncertainties.

She said Malaysia needs to aspire to become an innovation-based economy, changing from an economic model based on cost minimisation (low-cost model) to premium maximisation.

Work towards achieving this aspiration has already started, with the government having laid down the key strategies within national policy documents such as the 12th Malaysia Plan and the National Policy on Industry 4.0, she said.

"The challenge is to turn these plans and blueprints into action and results. For us to elevate our fundamentals as an innovation economy, we need to press on with reforms to strengthen the foundations of ideas, quality investments, talent, and market dynamism to ensure efficient allocation of resources," she added.

In concluding her speech, Nor Shamsiah said the next one to two years will present a crucial window for Malaysia to be taking bold steps forward.

She said the country must now focus on strengthening the economic fundamentals, resilience and flexibility.

"Our neighbours within the region are actively pressing on with reform measures. We run the risk of being left behind if we do not act now.

"History is instructive. We have, time and time again, done what is necessary to transform ourselves to reach for greater heights. I am certain that this time is no different," she added.

-- BERNAMA