Bank Negara Malaysia (BNM) left the overnight policy rate (OPR) unchanged at 3% for the ninth 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.

Malaysia's economy grew 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, as well as policy measures, providing support to consumption. The country's unemployment rate is projected to improve further to 3.1%.

Investment activity is projected to remain robust, driven by the ongoing rollout of multi-year projects across private and public sectors, alongside an elevated realisation rate of approved investments. Implementation of catalytic initiatives under national master plans further underpins this growth trajectory. These investments, coupled with increased capital imports, are expected to enhance export performance and expand Malaysia's productive capacity. Additionally, measures in Budget 2025 are anticipated to provide incremental support to growth.

The latest MPC statement highlights that the growth outlook is clouded by downside risks, notably from subdued external demand and softer commodity production. Conversely, upside risks are identified in the form of stronger spillover effects from the tech upcycle, a rebound in tourism activity, and accelerated investment project execution. These factors could bolster economic momentum, partially mitigating external headwinds and lending resilience to Malaysia's growth trajectory amidst a challenging global environment.

BNM observes that the global economy remains on an expansionary path, underpinned by resilient labour markets and a continued recovery in global trade. Looking ahead, global growth is expected to benefit from favourable labour market conditions, moderating inflationary pressures, and a shift towards a less restrictive monetary policy stance. The recovery in trade is anticipated to endure, supported by sustained demand across both E&E and non-E&E sectors. Nonetheless, BNM cautions that the global outlook is susceptible to downside risks, including potential escalations in geopolitical tensions, increased volatility in financial markets, and a deceleration in growth across key economies.

BNM has observed that the ringgit's performance remains predominantly influenced by external factors. The recent US election outcome, with Donald Trump securing the presidency and the Republican Party gaining control of both the House of Representatives and the Senate, is anticipated to introduce near-term volatility to the ringgit. However, the narrowing interest rate differentials between Malaysia and advanced economies are expected to support the ringgit's strength. Malaysia's favourable economic outlook, coupled with domestic structural reforms and initiatives aimed at encouraging capital inflows, should provide sustained support to the currency. In October 2024, the ringgit weakened to 4.40 against the US dollar amid cautious sentiment leading up to the 5 November election. A Trump administration, however, introduces a risk to the positive outlook for Asian currencies.

Keeping Our OPR Call Unchanged for 2025

Headline and core inflation have averaged 1.8% YoY YTD. In its latest MPS, BNM indicated that inflation is anticipated to remain manageable in 2025, underpinned by easing global cost conditions and the absence of significant domestic demand pressures. However, the inflation outlook hinges on the specifics of announced domestic policy measures. Upside risks to inflation include the spillover impact of policy changes, fluctuations in global commodity prices, and financial market dynamics. Key inflation drivers in 2025 may include the phased removal of RON95 petrol subsidies in mid-year, minimum wage adjustments, and an expanded SST scope. Additionally, we see potential for further subsidy rationalisation on essential goods, such as sugar, white rice and cooking oil, amplifying cost-push and demand-driven pressures on consumer prices. Other inflationary factors are likely to encompass civil servant salary hikes commencing in December 2024, mandatory EPF contributions for foreign employees and the multi-tier foreign worker levy.

Amid persistent downside risks to the growth outlook, we anticipate BNM will maintain a cautious stance into 2025, likely keeping the OPR unchanged at 3.00% throughout the year. This should help to narrow the negative interest rate differential with US rates. Following Donald Trump's presidential election victory, we foresee US economic policy in 2025 focusing on tariffs and tax adjustments. Consequently, we expect fewer Fed rate cuts in 2025, with the timing and specifics of Fed policy adjustments contingent upon the implementation of new tariff measures, adding a layer of uncertainty to the monetary landscape.

Source: PublicInvest Research - 7 Nov 2024