Bank Negara Malaysia (BNM) left the overnight policy rate (OPR) unchanged at 3% for the seventh consecutive meeting, in line with the prevailing market expectations. The latest monetary policy statement echoed the guidance provided in May, with no significant changes. 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.

For Malaysia, recent data signals sustained strength in economic activity for 2Q24, underpinned by robust domestic expenditure and enhanced export performance. Looking ahead, export growth is expected to gain additional momentum from the global tech upcycle, leveraging Malaysia’s pivotal role in the semiconductor supply chain, coupled with sustained strength in nonelectrical and electronics goods. Persistent employment and wage growth, alongside supportive policy measures, continue to underpin household spending. We project the unemployment rate to average around 3.3% for 2024.

Tourist arrivals and spending are poised for further increases. Investment endeavours stand to benefit from the continued advancement of multi-year initiatives across private and public sectors, the execution of catalytic programs delineated in national master plans, and the heightened realisation of approved investments.

Nonetheless, 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 spillover effects from the tech upcycle, robust tourism activity, and expedited implementation of both existing and new projects.

On the global stage, BNM has acknowledged that the global economy continues to expand, supported by resilient labour markets and a sustained recovery in global trade. Looking ahead, global growth is expected to be maintained, with positive labour market conditions and moderating inflation offsetting the headwinds from tight monetary policies and reduced fiscal support. The strengthening of global trade is bolstered by the momentum in the global tech upcycle. Recent months have seen both global headline and core inflation easing, with some central banks beginning to implement monetary policy easing. However, BNM cautions that the growth outlook is subject to downside risks, primarily stemming from the potential escalation of geopolitical tensions, higher-than-anticipated inflation outcomes, and volatility in global financial markets.

BNM has highlighted that the ringgit's trajectory remains largely influenced by external factors, particularly the anticipated monetary policy directions of major economies and persistent geopolitical tensions. The concerted efforts of the Government, BNM, Government-Linked Companies (GLCs), and GovernmentLinked Investment Companies (GLICs), alongside corporate engagements, have effectively mitigated some of the pressures on the ringgit. BNM remains vigilant in managing risks associated with elevated financial market volatility. Over the medium term, domestic structural reforms are expected to offer more enduring support to the ringgit.

Keeping Our OPR Call Unchanged

Both headline and core inflation averaged 1.8% YoY in the first five months of 2024. In the latest Monetary Policy Statement (MPS), BNM highlighted that, as anticipated, inflation is projected to trend higher in 2H24 due to the recent rationalisation of diesel subsidies. This contrasts with the previous statement in May, which suggested that "inflation in 2024 is expected to remain moderate, broadly reflecting stable demand conditions and contained cost pressures." Despite this, the rise in inflation is expected to remain manageable, supported by mitigation measures aimed at minimising cost impacts on businesses. Moving forward, the upside risk to inflation will depend on the extent of spillover effects from further domestic policy measures on subsidies and price controls, as well as global commodity prices and financial market developments. For the entire year, headline and core inflation are forecasted to average within the earlier projected ranges of 2.0%-3.5% and 2.0%-3.0%, respectively. In the May statement, it was noted that these forecasts have already considered the potential impacts of subsidy rationalisation.

Subsequently, the fuel price for diesel has remained at RM3.35 per litre since the diesel subsidy rationalisation programme commenced on 10 June. Given diesel's weight of just 0.2% in the overall headline CPI, we assess that the potential for significant inflationary effects is minimal. A straightforward calculation indicates that a 1% increase in diesel prices would result in a mere 0.002% rise in the overall inflation rate. Consequently, floating the diesel price from RM2.15 to RM3.35, representing a 55.8% increase, would contribute approximately 0.112% to the overall inflation rate.

In light of renewed fiscal discipline, the potential introduction of targeted subsidies for RON95 in 2H24 remains under review and is still uncertain. Concurrently, the substantial increase in civil servant salaries by over 13%, totalling approximately RM10bn, poses challenges to fiscal targets and could exacerbate inflationary pressures by elevating wage expectations in the private sector. Additionally, the rollout of EPF Account 3, injecting around RM30bn into consumer spending, aims to counteract sluggish global growth and rising living costs post-subsidy rationalization, though it may also induce demand-pull inflationary pressures. We maintain our in-house headline inflation projection at 3% YoY, with risks skewed towards the lower end of the official 2.0-3.5% range, contingent on the timing of RON95 subsidy rationalisation. Nonetheless, we believe that delaying these reforms until late 2024 remains an option, with further details expected during the Budget 2025 presentation. A gradual approach to subsidy reform is crucial to prevent abrupt inflationary shocks.

A neutral tone in the latest Monetary Policy Statement (MPS) and the depth of ongoing risks strengthen our view that the OPR will remain at 3.00% for the rest of 2024. BNM's consistent forward guidance since September 2023 indicates a level of comfort with the current monetary settings, suggesting no immediate need for policy adjustments. Additionally, government initiatives are anticipated to continue supporting the MYR towards the year-end. We forecast the ringgit to range within the 4.55-4.65 range by year end, considering the US Fed's widely anticipated rate cut cycle commencing in September, despite a slower pace of US FFR cuts than we initially expected earlier this year.

Source: PublicInvest Research - 12 Jul 2024