Bank Negara Malaysia (BNM) has maintained the overnight policy rate (OPR) at 3%, in line with prevailing market expectations. In the accompanying monetary policy statement, BNM acknowledges the imperative of guaranteeing that the monetary policy stance remains conducive to sustainable economic growth amid price stability. The Monetary Policy Committee (MPC) remains vigilant to ongoing developments to inform the assessment on the outlook of domestic inflation and growth.

On the domestic economy, the latest monetary policy statement underscores the 3Q23 advance GDP estimate's positive signal for economic activity, while the growth in 2024 is expected to be primarily fuelled by resilient domestic expenditure, with a potential boost from the anticipated recovery in E&E exports. Continued employment and wage growth remain supportive of household spending. We anticipate that the unemployment rate will average around 3.4% for the year. Furthermore, improvements in tourist arrivals and spending are expected, providing a substantial boost to the tourism sector. Malaysia is projected to exceed its initial 2023 target of 16.1 million international tourist arrivals, with expectations now reaching 18 million, supported by the recent announcement by Tourism, Arts, and Culture Minister Datuk Seri Tiong King Sing regarding the imminent introduction of a visa-free travel policy for Chinese tourists. Investment activity is poised for support through the ongoing advancement of multi-year infrastructure projects and the implementation of pivotal initiatives outlined in the recently unveiled national master plans. Simultaneously, financial institutions continue to operate with strong capital and liquidity buffers, with domestic financial conditions remaining conducive to sustain credit growth.

The latest MPC statement underscores the nuanced dynamics shaping growth prospects, further supported by measures under Budget 2024. While acknowledging the presence of certain downside risks linked to weaker-thanexpected external demand and larger and protracted declines in commodity production, the committee emphasises that the primary sources of upside risks predominantly stem from stronger-than-expected tourism activity, a stronger recovery from the E&E downcycle, and faster implementation of existing and new projects.

On the global stage, BNM has duly recognised the ongoing expansion of the global economy, primarily propelled by domestic demand within the context of strong labour market conditions. However, global growth is still hindered by persistently elevated inflation rates and elevated interest rates, with a number of major economies observing a deceleration in their growth momentum. BNM has also acknowledged early indications of an economic rebound in China, although its property market remains lacklustre. Nonetheless, our viewpoint continues to exercise caution regarding China's growth trajectory, underscoring ongoing concerns. We also take note of the recent approval of a significant RMB1 trillion allocation in Chinese government bonds, signifying Beijing's proactive approach to China's growth prospects. Global headline inflation has edged up, attributed in part to heightened commodity prices, while core inflation continues on a moderating trajectory. The prevailing stance for most central banks is expected to remain inclined toward a tight monetary policy. The overall outlook for global economic growth remains exposed to downside risks, primarily stemming from the prospect of unexpectedly high inflation, an escalation in geopolitical tensions, and a sudden tightening in financial market conditions.

Furthermore, the anticipation of a prolonged period of elevated interest rates in the US, coupled with growing apprehensions regarding the escalation of geopolitical conflicts, has been instrumental in sustaining the strength of the US dollar. Consequently, this phenomenon has had repercussions on various major and emerging market currencies, including the Malaysian ringgit. However, it was guided by BNM that these unfolding dynamics are unlikely to derail Malaysia's economic growth prospects.

Monetary Policy Outlook

On the inflation front, BNM informed that both headline and core inflation have moderated, mainly due to easing cost pressures. We believe that this moderation can, in part, be attributed to a heightened base effect emanating from the corresponding period in 2022. Furthermore, the continued implementation of price controls and fuel subsidies will persist as partial mitigating factors for this year, restraining the magnitude of inflationary pressures. As a consequence, we have revised our inflation projection for this year to 2.7%, deviating from our prior projection range of 3.0% to 3.5%, in contrast to MOF’s forecast range of 2.5% to 3.0%.

As we approach 2024, inflation is expected to remain modest. However, the inflation landscape is contingent upon a set of variables, notably hinging on domestic policy shifts related to subsidies and price controls, as well as global fluctuations in commodity prices and financial market dynamics. Notably, the government's proposed review of price controls and subsidies in 2024 will exert influence on the inflation and demand trajectory. However, the precise timeline and comprehensive details concerning the effective date and implementation of these Budget 2024 measures remain pending. Furthermore, we also believe that the domestic inflation outlook is subject to various other determinants that necessitate vigilant scrutiny in the short term. These encompass the increased cash aids, regional trade restrictions, particularly the export ban on rice and sugar, ongoing geopolitical tensions, and the expectation of prolonged higher global interest rates, which may perpetuate currency depreciation amid tighter global financial conditions.

Furthermore, we have observed that Budget 2024 primarily indicated the Government's intention to implement a phased rationalisation of fuel subsidies, with a particular emphasis on diesel, as an approach to address apparent inefficiencies. This decision is supported by data illustrating a noteworthy 40% increase in subsidised diesel sales from 2019 to the present, despite a marginal growth of less than 3% in the number of diesel vehicles. Of significance is the current fixed price of subsidised diesel at RM2.15/litre, in stark contrast to the market rate of RM3.75/litre, resulting in a government subsidy of RM1.60/litre, equivalent to an approximate total of RM1.5bn. However, it is surprising that there is no mention of a gradual, targeted rationalisation of the RON95 petrol subsidy.

On the direction of OPR, we anticipate that OPR will remain unchanged at 3.00% at least until 2Q24. BNM has underscored that the existing OPR level aligns with a supportive monetary policy stance for the economy, in line with the current evaluation of inflation and growth prospects.

Source: PublicInvest Research - 3 Nov 2023