Bank Negara Malaysia (BNM) is scheduled to hold its fourth monetary policy committee (MPC) meeting on July 11 which will be the maiden MPC meeting for the new governor. We expect BNM to maintain the overnight policy rate (OPR) at 3.25% despite the recent rate hikes by some of the regional central banks like Indonesia, the Philippines and India in a move to address inflation and capital outflow.

We believe the economy is not experiencing strong inflationary pressure. Besides, underpinned with external uncertainties such as the US-China trade war, rising interest rates by the US Fed and an emerging market crisis, we feel that BNM can maintain the current OPR at 3.25% throughout 2018 to support the domestic economy, though the normalization rate is at 3.50%.

Meanwhile, two key areas of our focus on inflation as we move forward will be: (1) stronger-than-expected rise in global oil prices which can add some pressure on the headline inflation only if the subsidy level is revised upwards; and (2) domestically, stronger-than-expected growth in demand that could support larger cost passthrough and raise demand-driven price pressures.

• Bank Negara Malaysia (BNM) is scheduled to hold its fourth monetary policy committee (MPC) meeting on July 11. It will be the maiden MPC meeting for the new governor.

• We expect BNM to maintain the overnight policy rate (OPR) at 3.25%. This is despite the recent rate hikes by some of the regional central banks such as Indonesia, the Philippines and India in a move to address inflation and capital outflow as the US Fed maintains its rate hike cycle.

• The economy is not experiencing strong inflationary pressure. Headline inflation for the first five months averaged at 1.7%, which is below our full forecast of 2.0%-2.5% (BNM is 2%-3%). Meanwhile, core inflation averaged at 1.8% for the first five months, which is below its long-term average of 2.3%.

• With the removal of the GST in June that will be replaced with the SST in September, added with the fuel subsidy, these should provide some cushion on inflation while supporting consumer spending. A healthy labour market with the unemployment rate at 3.3% in April, added with a steady manufacturing wage growth at 10.2% y/y in April are poised to aid consumer spending. However, there are no signs for a strong demand-pull inflationary pressure at the moment as reflected in Chart 4.

• At the same time, we see limited cost-push pressures. Despite the weakening of ringgit against the USD between April and close to end-June by about 4.2%, the impact on inflation remains well contained, probably due to the lagged effects. The subsidy on oil prices also helps contain cost pressures.

• Underpinned with external uncertainties such as the US-China trade war, rising interest rates by the US Fed and an emerging market crisis, added with a lack of domestic inflationary pressure, we believe BNM can maintain the current OPR at 3.25% throughout 2018 to support the domestic economy. This is despite the normalization rate of OPR that we expect to be at 3.50%

• Meanwhile, two key areas of our focus on inflation as we move forward will be: (1) stronger-than-expected rise in global oil prices which may add some pressure on the headline inflation only if the subsidy level is revised upwards; and (2) domestically, stronger-than-expected growth in demand which could support larger cost pass-through and raise demand driven-price pressures.

Source: AmInvest Research - 27 Jun 2018