The OPR Decision

Bank Negara Malaysia (BNM) hiked the Overnight Policy Rate (OPR) by 25 bps to 3.00%. This is the fifth rate hike since the central bank initiated its post Covid- 19 pandemic monetary policy normalisation, and the first rate hike made this year.

Overall, the language from the recent statement is somewhat similar to what was said back in March 2023. Nonetheless, one key point that we noticed, and perhaps could be the reason for this alteration is the specific view on core inflation, where the policy statement says that “…core inflation will remain at elevated levels amid firm demand conditions.” As of March 2023, Malaysia’s core inflation stood at 3.8% vis-à-vis its historical average of around 1.7%.

Global Growth Prospects

The pessimism on the global economic outlook persists as suggested by recent flow of economic data although the full potential downside from the US banking crisis remains fluid still at this juncture. The UST10Y/2Y remains inverted, an outcome that transpired since July 2022. Additionally, the recession probability based on Bloomberg data for the US increased slightly to 65%. Furthermore, the outlook for most advanced economies, especially for the UK and the Euro Area are not looking promising either as inflation remained sticky and lending conditions remained tight. Economic activities in China have not reached the heights that were previously expected when the euphoria about the end of its zero-Covid policy was at the epicentre earlier in January. Furthermore, China’s latest National Bureau of Statistic (NBS) manufacturing PMI unexpectedly dropped below the contraction level in April 2023 due to weaker external demand. Concluding the global growth prospect for the remaining months of the year would be the latest global outlook by the International Monetary Fund (IMF) with the fund is looking at 2.8% global economic growth in 2023 amid financial sector turmoil, high inflation, ongoing effects from Russia-Ukraine war and effects from Covid-19 pandemic.

The Path of Domestic Economy

We view that domestic demand will continue to be supportive of growth due to the sustained improvement in the labour market and private consumption pattern is expected to persist albeit at relatively moderate pace as compared to last year. Moreover, we still see the possibility for further improvement in the tourism sector judging from greater mobility across both domestic and international fronts. However, there are few moderating factors flanking our viewpoint on the Malaysian economy. Trade activities are expected to be slower due to a dimmed outlook from the external front, in line with how we foresee the situation concerning major economies. Furthermore, Malaysia’s manufacturing PMI remained under the contractionary level since September 2022 on subdued global demand. Against this backdrop, the manufacturing sector is likely to experience slower momentum ahead as sentiment across global trades correlates with this sector’s performance.

We Revised Our Inflation Forecast Higher

As mentioned in our special report (Malaysia Macro: Recent Developments Concerning Our Inflation Outlook-published on 20 April 2023), our base case now assumes that the electricity tariff, diesel prices, and price ceiling for chicken and eggs to be gradually removed in the 2H2023 as guided by the recent announcements.

On the demand side, employment growth, which is closely correlated to the core inflation has been slowing down since the 3Q2022. However, forward-looking indicators, such as the job vacancy is currently at 227k, or around 3.6 times higher than the pre-pandemic levels (62k vacancies). With tourism and the tourismrelated sectors are still recovering, today’s adjustment in the OPR could also imply a pre-emptive move on future price pressure.

We now see inflation in 2023 to be in the range of 3.0% - 3.5%, as compared to the previous estimate of 3.0%. This remains within the range of Ministry of Finance and Bank Negara Malaysia’s forecast of 2.8% – 3.8%

Our OPR Expectation

Now that our full-year expectation of the OPR at 3.00% has been realised, there is a case now that the monetary policy normalisation in Malaysia may have ended given the pessimism in the global growth outlook, particularly across the advanced economies, largely due to the cumulative effect from global monetary policy tightening and downside risks coming from the US banking crisis. Given the total 125 bps hikes over the last 12 months, the OPR has now reached its pre Covid- 19 pandemic level.

However, one point that we noted from the statement is “…in light of the continued strength of the Malaysian economy, the MPC also recognises the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances. At the current level, the monetary policy stance is slightly accommodative and remains supportive of the economy.” This could imply that future interest rates adjustment remains a possibility, depending on how the economy and core inflation indicators evolve for the months to come.

Source: AmInvest Research - 5 May 2023