The decision by Bank Negara Malaysia (BNM) to leave the policy rate unchanged at 3.25% was in line with our expectations after having raised rates by 25 basis points (bps) during the January 2018 monetary policy meeting. We are of the view that BNM will continue to maintain the current 3.25% policy rate in 2018.

We have placed a 20% chance of another rate hike in September. Much will depend on: (1) whether the US Fed overshoots the rate hike from 3 times to 4 times, each hike by 25bps or an extreme 50bps hike in one of the Fed’s meeting. Such move will influence the interest rate differentials between BNM and the Fed fund rates; and (2) the gaining momentum in the velocity of money in the local scene where if the speed gains momentum much faster, we can conclude a potential inflationary pressure coming from the demand side of the equation.

• The decision by Bank Negara Malaysia (BNM) to leave the policy rate unchanged at 3.25% was in line with our expectations after having raised rates by 25 basis points (bps) during the January 2018 monetary policy meeting.

• BNM’s tone was neutral in the sense that it expressed optimism on the economic growth being supported by domestic demand and exports.

• Besides, inflationary pressure is seen abating, thus allowing the economy to be in positive real returns. It is partly due to the stronger Malaysian ringgit (MYR) against the USD that will help mitigate import costs and ease the pressure on transfer pricing.

• However, BNM cautioned on the re-emergence of volatility in the equity markets and also the risks arising from global trade tensions.

• We are of the view that BNM will continue to maintain the current 3.25% policy rate in 2018. We have placed a 20% chance of another rate hike in September. Much will depend on: (1) whether the US Fed overshoots the rate hike from 3 times to 4 times, each hike by 25bps or an extreme 50bps hike in one of the Fed’s meeting. Such a move will influence the interest rate differentials between BNM and the Fed Fund rates; and (2) the gaining momentum in the velocity of money in the local scene where if the speed gains momentum much faster, we can conclude a potential inflationary pressure coming from the demand side of the equation.

Source: AmInvest Research - 8 Mar 2018