OPR Holds Steady at 3%

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.

The Malaysian economy expanded by 3.7% in 2023. Anticipated growth in 2024 is set to strengthen, propelled by the rebound in exports and resilient domestic spending. The shift towards positive export growth, following a contraction since March 2023, is bolstered by the resurgence in global trade dynamics, providing a sustained tailwind for economic expansion. Continued employment and wage growth remain supportive of household spending. We anticipate that the unemployment rate will average around 3.3% for this year. Tourist arrivals and spending are poised for further increases. Malaysia recorded a total of 20.1 million international tourist arrivals and RM71.3 billion in tourist receipts in 2023, surpassing its initial target of 16.1 million arrivals. 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 expected to receive a boost from the continued advancement of multi-year projects across private and public sectors, the execution of catalytic initiatives outlined in national master plans, and an uptick in investment realisation.

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 global economy continues to expand albeit moderately, primarily propelled by domestic demand amid improvement in trade activity. Favourable labour market conditions in select countries are bolstering consumption activity, with regional economies anticipated to see improved growth, while China's expansion is likely to remain subdued due to ongoing weaknesses in its property market. Strengthening global trade, driven by the accelerating tech upcycle, is expected. Although global headline and core inflation have recently trended downwards, prompting potential monetary easing in some countries later in the year, overall monetary policy is expected to remain tight in the near term due to persistently aboveaverage inflation. However, the growth outlook is vulnerable to downside risks, including heightened geopolitical tensions, unexpected inflationary pressures, and volatility in global financial markets.

BNM has underscored the current undervaluation of the ringgit, aligning with Malaysia's robust economic fundamentals and growth potential. Coordinated efforts by the Government and Bank Negara Malaysia to facilitate the repatriation and conversion of foreign investment income by GovernmentLinked Companies (GLCs) and Government-Linked Investment Companies (GLICs) are bolstering inflows, thereby reinforcing the ringgit. Furthermore, sustained structural reforms over the medium term are poised to offer enduring support to the currency.

Monetary Policy Outlook

Headline and core inflation, at 1.5% and 1.8% respectively in January 2024, aligned with expectations. BNM anticipates moderate inflation throughout 2024, primarily driven by stable demand and controlled cost pressures. Nevertheless, the trajectory remains contingent upon domestic policy regarding subsidies and price controls, alongside global commodity prices and financial market dynamics. 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.

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 - 8 Mar 2024