The OPR Remains at 2.75%

In line with our expectation, Bank Negara Malaysia (BNM) keeps the Overnight Policy Rate (OPR) unchanged at 2.75%. This status quo decision is to allow the economy to readjust to the 100 bps rate hike that was made last year.

The overall tone was almost similar relative to the previous statement back in January 2023. The only noticeable points were BNM’s view on risk to global growth outlook coming from “…higher-than-anticipated inflation outturns”, and pressure on domestic inflation will be partly contained by “…remaining space capacity in the economy,” suggesting there is some slack in the domestic economy.

Upbeat on Global Growth Prospects

The reopening of the China’s economy has certainly provided some boost on global sentiment. Furthermore, economic activity in the US and the Eurozone were better than expected. However, the risk to global growth remained, where the Monetary Policy Committee (MPC) statement mentioned that “…some central banks are expected to continue raising interest rates to manage inflationary pressures.”

From our point of view, the uncertain outlook is largely coming from the US Fed Funds Rate direction as recent economic data continued to point to economic strength, resulting in re-pricing of the terminal rate. As Fed Funds Rate is now expected to be higher for longer, the UST10Y/2Y spread, which is the signal for a recession has widened to 107 bps. Based on latest Bloomberg’s data, the recession probability for the US now stands at 60% (Feb 2023: 65%), which is still higher since the end of the pandemic. The strength in labour market and upside surprises in inflation numbers of late may prompt the Federal Open Market Committee (FOMC) to readjust their interest rates to stay higher for longer. Currently, our base case is the Fed Funds Rate to peak at 5.25% - 5.50%, and no rate cut to be made this year.

Domestic Economy Activity to Moderate

On the domestic economy, the MPC said that “…the economy is expected to moderate in 2023 amid a slower global economy,” similar to what was mentioned back in January 2023’s statement. We view that the domestic demand will continue to be supportive to growth due to the sustained improvement in the labour market. However, trade activities are expected to be slower due to dimmed outlook from the external front where exports grew only by 1.6% in January 2023. Despite improving, the latest manufacturing PMI remained under the contractionary region since September 2022, as shown in Exhibit 4.

Source: AmInvest Research - 10 Mar 2023