In line with our and market expectations, BNM left the benchmark policy rate unchanged at 3.25%. We noticed BNM presented two key issues: (1) trade tension has started to yield a material impact on global trade and investment; and (2) domestic inflation is expected to rise moderately and will follow global oil prices which have been volatile.

We expect BNM to remain vigilant during the year, focusing on the development of both the external and domestic fronts. Our base case remains that BNM will hold the policy rate unchanged at 3.25%. However, we have raised the probability for a rate cut by 25–50bps to 40% in 2019 with room to further raise our rate cut probability. It will be governed by issues like: (1) inflation remaining low with a lack of pickup in the underlying inflationary momentum; and (2) growing risks for nominal GDP to undershoot and possibly head towards a “nominal recession”.

• In line with our and market expectations, Bank Negara Malaysia (BNM) left the benchmark policy rate unchanged at 3.25%. Looking at the monetary policy statement, we noticed BNM presented two key issues. The first issue is that trade tension has started to yield a material impact on global trade and investment. The other issue is on domestic inflation which is expected to rise moderately. It will follow global oil prices which have been volatile.

• We concur with BNM’s view that the current level of the OPR is consistent with the intended policy stance. We expect BNM to remain vigilant by continuing to monitor and assess the balance of risks surrounding the domestic economic activities and the inflationary environment.

• Hence, our base case view that BNM will keep OPR unchanged in 2019 is still being maintained. However, with the external noises causing the global growth to grow moderately in 2019, added with domestic challenges, we believe there is room for BNM to cut rates by 25–50 bps during the year. This can happen if we start to see the potential incoming data suggesting that inflation remains low with a lack of pickup in the underlying inflationary momentum. Also, if there are growing risks for nominal GDP to undershoot and possibly head towards a “nominal recession”.

• Under these circumstances there is a need to support private consumption given the limited fiscal space. Rate cut seems possible especially with such a wide positive interest rates differential. We have placed a 40% chance to witness a rate cut in 2019, with room to raise the probability even higher. Possibility for a rate cut could happen as early as 2Q2019, especially if the 1Q2019 GDP number weakens more than 4Q2018.

Source: AmInvest Research - 25 Jan 2019