Malaysia – OPR Lifted by 25bps

Highlights

Bank Negara Malaysia has decided to increase the OPR by 25bps, pushing the OPR to 2.50%, in line with our expectation and consensus. This will be the third OPR hike made this year, resulting in a cumulative of 75bps rate hike so far.

The main reason for the OPR hike was stronger growth and inflationary concerns coming from both supply and demand factors. As for supply factors, the weakening of the ringgit (-7.2% ytd), higher Producer Price Index (July 2022: 7.6% y/y), and elevated global commodity prices have caused consumer inflation to increase to 4.4% y/y in July 2022.

There was also some pressure from the demand side, particularly the improving labour market. The unemployment rate has declined to 3.8%, which is the lowest level since the pandemic. Growth in employment was stronger, up by 4.2% y/y in June (May 2022: 3.4% y/y). Plus, total vacancies in the labour market were still high at 4–5 times higher than pre-pandemic levels.

Spending indicators were also strong. Data showed credit card spending increasing by 43.2% in July 2022 (2021 average: 16.1%), emoney spending surging by 102.9% in July 2022 (2021 average: 38.8%), while retail spending climbing by 38.4% in July 2022 (2021 average: 5.83%).

From BNM’s perspective, the faster tightening by major central banks and slower economic growth from China will affect global growth prospects. However, strong domestic growth will be driven by consumption and the resumption of international travels.

Also, markets are pessimistic on the outlook for the US, UK, Europe and China due to high inflation and tighter financial conditions. Malaysia’s strong fundamentals are still attractive to foreign investors, where was an inflow of RM8.2bil (year to date) was recorded in the equity market.

Currently, the ringgit is trading around our 3Q outlook of 4.50, and we expect the ringgit to appreciate to 4.40–4.45 in 4Q this year. Since March this year, BNM has been defending the currency from depreciating further. International reserves as of August 2022 stood at US$108.2bil (July 2022: US$109.2bil).

This means retained imports stood at 4.1 months as of July 2022 (2021 average: 5.7).

We also revised upward our USDMYR forecast from 4.35-4.40 to 4.40- 4.45 range.

There is a possibility that another 25bps rate hike will be made in the November meeting, depending on incoming data.

Source: AmInvest Research - 9 Sept 2022