- Broad-based interest rate for Malaysia remained unchanged for a year. The Overnight Policy Rate (OPR) has remained at 3.25% since July 2014, when BNM last raised the OPR by 25bps. Despite the positive real interest rate environment since 2H14, savings deposits rate remains unattractive. All in, deposit growth for the banking system moderated to 7.7% YoY in May, from 8.4% YoY in April. Deposit growth rate slowed on the back of the decline in both term and savings deposits. Note that domestic savings have been on a downward trend since 3Q13. As for term deposits, the 12-months fixed deposit rate continues to reflect positive real interest rate in May 2015 but total fixed deposits in the banking system had contracted for the last nine months.

- BNM maintains an accommodative monetary policy. Monetary policy will likely remain unchanged for the rest of the year amid the ongoing uncertainties. While prices have been on the rise due to GST and also the upward adjustment in petrol pump prices in May and June, the overall economy has slowed post GST. The slowdown in private consumption coupled with weaker-than-expected global demand signal softer GDP growth during 2Q15. Also, the weak Ringgit is unlikely to instigate a hike in interest rate mainly because BNM is not an exchange rate-targeting central bank. That said, the benchmark interest rate is likely to remain at 3.25% for the rest of the year.

- Savings deposits rate hovers at 1.065%-1.078% since July 2014. Compared to the OPR level of 3.25%, the spread of savings deposits rate to the OPR was between -2.172ppts and -2.185ppts. As such, negative real interest rate from savings and consumers’ spending habits will likely discourage savings going forward. Real savings rate in May 2015 was -1.03%. Inflation rate has been on the rise as it stood at 2.1% in May vs. savings deposits rate of 1.07%. Although overall savings in Malaysia has been growing from December 1998 until April 2015, the rate of growth has been slowing before it dipped in May 2015. Total saving deposits fell for the first time in almost 17 years to register -0.9% YoY in May.

- International carry trades remain high. Global holdings of Malaysia’s government bonds surged to an all-time high in June. When included both conventional and Islamic sovereign bonds, global holdings rose to 32% of total outstanding government bonds (vs. 31.2% in May). Mainly, the increase in global holdings bonds was driven by the foreign holdings of MGS which rose to an all-time high of RM166.8bil (or +5.5% MoM). That accounted for 48.5% of total outstanding MGS in June vs. 46.9% in May. Elsewhere, Government Investment Issues (GII) slipped by 10% MoM to RM9.8bil in June compared to an all-time high of RM10.9bil in May. Note that real interest rate stood at +0.75% in June while inflation rate was at 2.5% YoY.

Source: AmeSecurities Research - 31 Jul 2015