Malaysia

BNM to maintain OPR in May

Factory-gate inflation remained in the negative growth trajectory for the third month, weighed down by the stronger MYR against the USD, firm commodity prices, rising borrowing costs and a high base. However, it fell at a slower pace by -2.2% y/y in March.

We expect the producer prices to stay weak in the coming months weighed by the stronger USD/MYR and high base effect but will be muted by firmer commodity prices from the trade war impact between China and the US that have fuelled worries about the inflation outlook. We expect Bank Negara to maintain the 3.25% OPR during the May 10 monetary policy meeting.

• Factory-gate inflation remained in the negative growth trajectory for the third month, weighed down by the stronger MYR against the USD, firm commodity prices, rising borrowing costs and high base. In March, it fell albeit at a slower pace by - 2.2% y/y from -3.4% y/y in February.

• We noticed a slower drop in factory-gate inflation from components like crude materials. It fell -0.7% y/y in March from - 5.8%y/y in February. Likewise, the intermediate materials prices dropped -2.8% y/y in March from -2.9% y/y in February. Meanwhile, the producer price for finished goods declined -2.2% y/y in March from -2.1% y/y in February.

• We expect the producer prices to stay weak in the coming months weighed by the stronger USD/MYR and high base effect. However, the drop in factory-gate prices will be somewhat muted with a firmer commodity prices from the tit-for-tat tariffs impact between China and the US that have fuelled worries about the inflation outlook.

• With the factory-gate inflation as well as consumer inflation being fairly weak at the moment, we are of the view that Bank Negara will maintain its current 3.25% OPR in the coming monetary policy meeting which is scheduled on May 10 after having raised the policy rate by 25 basis points in January 2018.

Australia

No clear consensus for rate hike

As expected, the RBA left its official interest rates on hold in May for a 19th consecutive meeting, keeping the official cash rate at 1.5% where it has sat since August 2016. The RBA has continued to make it clear that it expects the next interest rate move to be an increase, rather than a cut.

Though there is no clear consensus on when the hike will arrive, we believe to get the first rate hike move, the economy will need to register some reduction in underemployment and confirmation that the price and wage cycles have turned. We feel the start date for a modest rate hike is unlikely to happen in 2018 but more so into 2019 with the rate hike cycle to reach slightly below the 3.5% neutral rate by 2020.

• The Reserve Bank Australia (RBA) as expected left its official interest rates on hold in May for a 19th consecutive meeting, deepening the record-breaking period without a rate movement. It kept the official cash rate at 1.5% where it has sat since August 2016.

• The decision to leave the policy rate unchanged was due to subdued macro data such as the labour market where wage growth is still weak, unemployment rate remains high at 5.5%, inflation is at 1.9% y/y in 1Q2018 and high household debt.

• The RBA has continued to make it clear that it expects the next interest rate move to be an increase, rather than a cut. We noticed the there is no clear consensus on when the hike will arrive, with some expecting later in 2019 and some late 2019 and early 2020.

• We believe to get the first rate hike move, the economy will need to register some reduction in underemployment and confirmation that the price and wage cycles have turned. So we feel the start date for a modest rate hike is unlikely to happen in 2018 but more so into 2019 with the rate hike cycle to reach slightly below the 3.5% neutral rate by 2020.

Source: AmInvest Research - 2 May 2018