Executive Summary

As widely anticipated, BNM decided to maintain the Overnight Policy Rate (OPR) at 3.0%, which has remained unchanged since July 2023. The overall tone of the Monetary Policy Statement (MPS) appears more optimistic than its previous iteration, given the robust domestic growth and ringgit recovery. The upside and downside risks involving the global and domestic economy remain largely the same versus the previous MPS, and, once again, without China's economic imperatives. Though, there is a slightly reduced emphasis on the global economic conditions. This indicates that MPC members are interested in showcasing Malaysia's economic strength compared to the rest of the world.

Contrasting the external sentiments, we believe that MPC members are hopeful for a global soft-landing because of the words "global growth is expected to be sustained" and "global trade recovery is expected to continue".

Considering Malaysia's subdued inflation and a flattish unemployment rate, we posit that the OPR will stay at 3.00% in 2H2024, which is appropriate and sufficiently supportive of the domestic economy. We have recently revised our inflation FY2024 forecast lower from 3.0% to 2.1%, aligning with MPC's latest thinking.

Despite the positive tone, we noticed that market pricing, of late, is suggesting the BNM cut interest rates beyond 1H2025. Multiple market indicators, such as the spreads of market implied 1Y policy rate, onshore 1Y IRS swap, and even the less obvious MGS 3Y over the OPR, have shown a narrowing trend over the past few weeks. Indirectly, the market is betting that the OPR will be cut somewhere in 2H2025. However, it is premature for us to agree with the market for now, pending further clarity.

Source: AmInvest Research - 6 Sept 2024