Bank Negara Malaysia (BNM) has maintained the overnight policy rate (OPR) at 3%, in line with the 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, 4Q23 advance estimates for GDP affirmed that the overall growth for 2023 expanded within expectations. Moving forward, growth is expected to improve in 2024, supported by the recovery in exports and resilient domestic expenditure. Continued employment and wage growth remain supportive of household spending. We anticipate that the unemployment rate will average around 3.4% for this year. Furthermore, improvements in tourist arrivals and spending are expected, providing a substantial boost to the tourism sector. Tourism Malaysia has established ambitious targets for the year 2024, aiming to attract 27.3mn tourist arrivals and generate a revenue of RM102.7bn. This strategic vision aligns with the broader preparations for the Visit Malaysia Year (VMY) scheduled for 2026. Notably, the forthcoming VMY in 2026 has set an even more ambitious objective, with the government aiming to welcome 35.6mn foreign tourist arrivals. Investment activity is poised for support through the ongoing advancement of multi-year infrastructure projects in both the private and public sectors 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 recognises that the growth outlook is contingent upon downside risks associated with lower-than-anticipated external demand and more substantial declines in commodity production. Conversely, potential upsides to growth primarily derive from increased spill over effects from the tech upcycle, robust tourism activity, and expedited implementation of both 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. Despite indications of recovery in the electrical and electronics (E&E) sector, global trade faces challenges due to the persistent shift from goods to services in consumer spending and ongoing trade restrictions. Although China's economy is exhibiting signs of improvement, the recovery is tempered by weaknesses in the property market. Recent months have seen a marginal decline in global headline and core inflation, but levels remain above average. On the global scale, while monetary policy is expected to maintain a tight stance in the near term, many central banks have reached the peak of their tightening cycles. The outlook for growth is overshadowed by downside risks, primarily stemming from potential escalations in geopolitical tensions, unforeseen spikes in inflation, and increased volatility in global financial markets..

BNM has emphasised that recent movement in the ringgit are predominantly influenced by external factors, not indicative of the prevailing domestic economic performance and prospects. With the persistent risk of increased volatility in global financial and foreign exchange markets, BNM is committed to maintaining adequate liquidity to uphold the systematic operation of the domestic foreign exchange market..

Monetary Policy Outlook.

BNM has reported a sustained moderation in both headline and core inflation during 4Q23, primarily attributed to reduced cost pressures amid stabilizing demand conditions. Notably, 2023 witnessed both headline and core inflation aligning with expectations at 2.5% and 3.0%, respectively. BNM anticipates a continuation of modest inflation in 2024, reflecting overall stability in cost and demand dynamics. However, the inflation outlook remains susceptible to shifts in domestic policies related to subsidies and price controls, along with fluctuations in global commodity prices and financial market developments. The impending review of price controls and subsidies by the Government in 2024 adds an element of uncertainty to the trajectory of inflation and demand conditions..

Our projection suggests that the inflation trajectory for this year is poised for an ascent to 3.0%. This projection depends on detailed information and a timeline regarding measures outlined in Budget 2024, especially concerning subsidy rationalization and potential increments in indirect taxes. The Government's inclusive inflation forecast for 2024, ranging from 2.1% to 3.6%, reinforces the view that the Budget is a dynamic fiscal blueprint undergoing continuous refinement. Additionally, the domestic inflation outlook is subject to determinants such as increased cash aids, regional trade restrictions, geopolitical tensions, and expectations of prolonged higher global interest rates, potentially leading to currency depreciation amid tighter global financial conditions..

As guided earlier, Budget 2024 signals the government's commitment to a phased rationalization of fuel subsidies, particularly for diesel, aimed at addressing perceived inefficiencies. This strategic move is substantiated by data revealing a substantial 40% surge in subsidized diesel sales from 2019 to the present, juxtaposed with a modest growth of less than 3% in the number of diesel vehicles. Noteworthy is the prevailing fixed price of subsidized diesel at RM2.15/litre, sharply contrasting with the market rate of RM3.75/litre (as stipulated in Budget 2024 disclosed in October 2023). This pricing misalignment results in a government subsidy of RM1.60/litre, aggregating to an approximate total of RM1.5bn..

Given the adjustment of the OPR to pre-pandemic levels, we believe that the OPR will hold steady at 3.00% through 2024. BNM underscores that the existing OPR level aligns with a supportive monetary policy stance for the economy, consistent with the current evaluation of inflation and growth prospects.

Source: PublicInvest Research - 26 Jan 2024