Bank Negara Malaysia (BNM) left the overnight policy rate (OPR) unchanged at 3% for the eighth consecutive meeting, in line with the 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 going into 2025.  

For Malaysia, the economy expanded by 5.1% YoY in 1H24. Recent indicators suggest sustained momentum in economic activity, supported by steady domestic expenditure and higher export activity. Going forward, exports are likely to gain further traction amid the global tech upcycle, given Malaysia’s position in the semiconductor supply chain, alongside continued strength in non-E&E goods. Labour market conditions remain favourable, with employment and wage growth providing support to consumption. We expect the unemployment rate to average around 3.3% in 2024.  

Tourist spending is anticipated to maintain its upward trajectory. The robust expansion in investment activity is expected to be sustained by the advancement of multi-year projects in both private and public sectors, alongside the implementation of catalytic initiatives under the national master plans and a higher realisation of approved investments. Concurrently, increased imports of intermediate and capital goods are set to bolster export and investment activity.  

Nonetheless, the latest MPC statement acknowledges that the growth outlook remains subject to downside risks, particularly from weaker-than-expected external demand and softer commodity production. On the upside, growth could be bolstered by stronger-than-anticipated spillovers from the global tech upcycle, a more pronounced recovery in tourism activity, and the accelerated implementation of investment projects. We believe that these factors could provide additional support to economic momentum, offsetting some of the potential headwinds from the external environment.  

On the global front, BNM has noted that the global economy continues to expand, supported by resilient labour markets and the ongoing recovery in global trade. Looking ahead, global growth is projected to be underpinned by favourable labour market conditions, easing inflationary pressures, and a less restrictive monetary policy stance. The recovery in global trade is expected to persist, driven by sustained demand for both electrical and electronics (E&E) and non-E&E products. However, BNM warns that the global growth outlook remains subject to downside risks, particularly from a potential escalation in geopolitical tensions, heightened volatility in global financial markets, and a slowdown in growth momentum across major economies.  

BNM has highlighted that the recent recovery in the ringgit is driven by the shift in expectations of lower interest rates in major economies, particularly the US, as well as Malaysia’s strong economic performance. Looking ahead, Malaysia’s positive economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage capital flows, will continue to provide enduring support to the ringgit. We note a subtle shift in BNM’s tone, moving from a balanced acknowledgment of risks and supports to a slightly more optimistic outlook, as it reduces emphasis on external pressures and provides a clearer recognition of the ringgit’s recent recovery, underpinned by both domestic factors and changing global interest rate expectations.  

Keeping Our OPR Call Unchanged  

Both headline and core inflation averaged 1.8% YoY in 1H24. In the latest Monetary Policy Statement (MPS), BNM emphasised that the spillover effects from the diesel price adjustment on broader price levels have been contained, owing to effective mitigation and enforcement measures to limit cost passthrough to businesses. For 2024, average headline and core inflation are projected to stay within the previously forecasted ranges and are unlikely to exceed 3%. This marks a slight shift from the July statement, with the September statement explicitly noting the improbability of inflation breaching the 3% threshold. Nonetheless, the inflation outlook remains highly contingent on the implementation of further domestic policy measures. Upside risks to inflation would hinge on the extent of spillover effects from changes in subsidies and price controls, as well as movements in global commodity prices and financial market dynamics.  

On 10 June, the retail price of diesel surged by 55.8% to RM3.35/litre. However, for the week of September 5 to 11, the retail price in Peninsular Malaysia was adjusted downwards to RM3.16/litre, reflecting a decline in global oil prices. Given diesel's minimal weighting of 0.2% in the overall headline CPI, the resulting inflationary impact remains limited. Our analysis suggests that a 1% increase in diesel prices would lead to only a 0.002% rise in the overall inflation rate.  

The potential introduction of targeted subsidies for RON95 in 2H24 remains under review, with no decision yet on the timing or mechanism for implementation. Concurrently, the rollout of EPF Account 3 is expected to inject approximately RM30bn into consumer spending, aimed at offsetting rising living costs post-subsidy rationalisation, although this may also lead to demand-pull inflationary pressures. The staggered introduction of the new pay structure for civil servants, with phase 1 in December 2024 and phase 2 in January 2026, poses additional challenges to fiscal targets and may intensify inflationary pressures by raising wage expectations within the private sector. However, the government's phased approach to salary adjustments reflects a strategy to manage these impacts and prevent significant economic shocks. Additionally, pension adjustments are planned for December 2024, based on final salary revisions for retirees. In response, all ministries have been directed to intensify price monitoring efforts to prevent unwarranted and excessive price increases. Given that CPI averaged just 1.8% in the first seven months, coupled with the minimal inflationary impact from the services tax adjustment and diesel subsidy rationalisation, as well as the expected delay in RON95 subsidy reform, we have revised our full-year inflation forecast downward to 2.0%, placing it at the lower bound of the official 2.0%-3.5% target range. To prevent sudden inflationary shocks, a phased approach to RON95 subsidy rationalisation is essential, considering its 5% weighting in the CPI basket. If implemented in 4Q24, we anticipate CPI will stay within the official target range. Furthermore, BNM’s neutral stance in the latest MPS, alongside ongoing risks, reinforces our view that the OPR will likely hold steady at 3.00% through 2024.

Source: PublicInvest Research - 6 Sept 2024