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

For the Malaysian economy, the overall growth was within expectations in 2024. Moving forward, the strength in economic activity is expected to be sustained in 2025, driven by resilient domestic expenditure. Labour market conditions remain favourable, with employment and wage growth, as well as policy measures, including the upward revision of the minimum wage and civil servant salaries, providing support to consumption. The country's unemployment rate is projected to improve further from 3.3% to 3.2% this year.

The strong expansion in investment activity is expected to be sustained by the progress of multi-year projects across both private and public sectors, alongside the continued high realisation of approved investments and the ongoing implementation of catalytic initiatives under national master plans. These investments, supported by higher capital imports, will enhance exports and expand the economy's productive capacity. Export performance is anticipated to benefit from the global tech upcycle, sustained growth in non-electrical and electronics (non-E&E) goods, and higher tourist spending. Additionally, measures introduced under Budget 2025 are expected to provide additional support to growth.

The latest MPC statement highlights that the growth outlook is clouded by downside risks, notably from an economic slowdown in major trading partners amid heightened risk of trade and investment restrictions, and lower-than-expected commodity production. Meanwhile, growth could potentially be higher from greater spillover from the tech upcycle, more robust tourism activity, and faster implementation of investment projects. 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 growth for 2024 turned out higher-than-expected, reflecting better outturns in the major economies and stronger global trade. For 2025, the global economy is anticipated to be sustained by positive labour market conditions, moderating inflation and less restrictive monetary policy. Global trade is expected to remain broadly sustained, supported by the continued tech upcycle. Nonetheless, BNM cautions that the global outlook is susceptible to downside risks, including uncertainty surrounding more trade and investment restrictions. The elevated policy uncertainties could also lead to greater volatility in the global financial markets.

BNM noted that the ringgit's performance remains largely driven by external factors. The narrowing interest rate differentials between Malaysia and advanced economies are expected to be supportive of the ringgit. While financial markets may face intermittent volatility amid global policy uncertainties, Malaysia's solid economic prospects and domestic structural reforms, alongside ongoing initiatives to attract inflows, will provide sustained support to the ringgit.

Keeping Our OPR Call Unchanged for 2025

Headline and core inflation averaged 1.8% YoY in 2024. In its latest MPS, BNM signalled that inflation is expected to remain manageable in 2025, supported by easing global cost pressures and the absence of substantial domestic demand-driven inflationary pressures. Global commodity prices are projected to trend lower, contributing to a more moderate cost environment in the near term. Against this backdrop, the overall impact of recently announced domestic policy reforms on inflation is expected to remain contained. Upside risks to inflation will depend on the extent of spillover effects from domestic policy measures, alongside global commodity price movements and financial market developments. Key inflation drivers in 2025 may include the phased removal of RON95 petrol subsidies by mid-year, minimum wage adjustments, and an expanded SST scope. Nonetheless, the implementation of the tiered pricing mechanism for RON95 is not expected to have a significant impact on up to 85% of the population. 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 and with domestic growth and inflation remaining broadly in line with BNM's assessment, we expect BNM to maintain a cautious stance, likely keeping the OPR unchanged at 3.00% throughout 2025. This should contribute to narrowing the negative interest rate differential with US rates, though we do not rule out the possibility that the Fed could pause rate cuts. We believe the MPC is likely to adopt a wait-and-see approach, seeking further clarity on US trade and tariff policies, upcoming data releases, and domestic policy developments to assess their impact on growth and inflation. While US President Trump refrained from imposing immediate tariffs on Day 1, he has reaffirmed that tariffs remain a key priority on his agenda, subsequently announcing tariffs on China, Canada and Mexico effective from 1 February.

Source: PublicInvest Research - 23 Jan 2025