-  As anticipated, Bank Negara Malaysia (BNM) maintained the Overnight Policy Rate (OPR) at 3.00% and considers the current stance of monetary policy to be appropriate given its outlook for both inflation and growth. According to the monetary policy statement, the global economy continues to experience slow growth as advanced economies remained weak.

-  Additionally, BNM highlighted that domestic demand has been supportive of growth amid moderation in external trades. The sustained weakness in the external environment may, however, affect the overall growth momentum in 2013.

-  Separately, we believe that private consumption will remain supportive of growth on the back of the stable labour market conditions. The unemployment rate was registered at 2.8% in June and has been trending below 4.0% (which is the full employment threshold) since April 2009.

-  Meanwhile, inflation remained low at 1.7% as of YTD July but is expected to rise in 4Q13 amidst the higher fuel prices effective September 2013. Based on our estimate, inflation will breach 3.0% in 4Q13 and is likely to persist above 3.0% for most part of 2014 owing tohigher petrol pump prices and also the possibility of further subsidy cuts in the coming months.

-  Despite the risk of higher inflationary pressure in 4Q13, BNM will likely retain the OPR at 3.0% for the remaining of 2013 owing to the uncertainties abroad and spillover effect coming from the potential tapering of QE in the US. Interest rate has been maintained since the last upward revision of 25bps on May 5, 2011. The next monetary policy meeting is on November 7.

-  Looking ahead at 2014, we envisage BNM raising the interest rate by 25 bps in 2H14 on the back of higher cost pressure. There isthe likelihood of a prolonged negative real interest rate environment should prices remain elevated for an extended period.

-  Elsewhere, anticipation of the tapering of QE by the US Fed will continue to pose weaknesses ahead for the Ringgit, owing to the heavy outflow of foreign funds as investors revert to holding the Greenback as a safe haven. The upcoming Federal Open Market Committee will resume its monetary policy meeting on September 17-18.

-  The Fed had highlighted in its Beige Book released on September 4 that the manufacturing sector is expanding at a modest pace while consumer spending had advanced in the recent months. Aside from that, the Commerce Department reported on the same day that trade deficit in the US widened in July from an almost four-year lowin June signalling that the world’s largest economy is gaining traction.

-  Having said that, market is factoring in the likelihood of QE to be scaled back during the meeting this month. The FOMC this month will probably begin to reduce its bond buying, according to 65% of economists surveyed by Bloomberg.

-  The Fed will probably reduce the monthly asset purchases at a gradual pace. In terms of the quantum of reduction, consensus expects an initial decline of USD10bil per month before subsequently heightening the reduction of ongoing purchase, and thereafter, to gradually bring the asset purchase programme to a halt by mid-2014.

Source: AmeSecurities