• Overnight Policy Rate maintained at 3.0%

• The tone of the latest Monetary Policy Statement (MPS) is largely unchanged

• Political, policy developments in major economies and geopolitical risks remain as threat to growth

• MPC confidence of higher growth

• Maintain our view of stable OPR in 2017

As expected, Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) at 3.0% for its seventh straight MPC meeting on 7 September 2017, as policymakers said that the current stance is supportive of economic activity.

MPC confidence of higher growth

The MPS essentially suggests the Monetary Policy Committee’s (MPC) confidence that growth in 2017 will be stronger than earlier expected. Stout trade performance added with stronger domestic demand put domestic economy on higher growth in 2017. Positive spillover effects from the surging exports are expected to continue into the second half of 2017.

BNM is keeping its monetary policy stance to remain accommodative and supportive of the domestic economy which picked up 5.8% yoy in 2Q17. The momentum is expected to be sustained in 2H17 amid the synchronized pick up in global economic activities. This is positive for Malaysia’s exports, in addition to the steady domestic demand driven by continued wage and employment growth, as well as the implementation of new and on-going investment projects together with sustained capital investment in manufacturing and services sectors.

Notwithstanding the potential upside in growth, BNM maintained its view that headline inflation will moderate in 2H17 (Jan-Jul 2017: 4.0% yoy), on expectations of a smaller effect from global cost factors. Core inflation will be sustained by robust domestic demand but to remain contained for the rest of the year.

Maintain our view of stable OPR in 2017

Bank Negara, as widely expected, kept the OPR at 3.0% after the policy review on 7 September. This is despite a stronger-than-expected GDP performance of 5.8% in 2Q17 and 5.7% on average in 1H17. The central bank expects growth in 2017 to be stronger than earlier projected.

While stronger-than-anticipated growth is welcoming news to Bank Negara, inflation is expected to continue to moderate. And this is perhaps the key guiding indicator for the central bank at present. Headline inflation for July 2017 registered 3.2% yoy, down from 3.6% previously and from the peak of 5.1% in March. While food inflation remains elevated (4.2%), transport inflation is still the main driver in the downward shift. The latter eased to 7.7% in the month from 10.5% in June and off the peak of 23.0% in March. In addition, transport inflation will likely continue to moderate in the coming months due to base effects and is expected to continue to drive the headline CPI inflation figure down with it as well. Looking ahead, we envisage the headline inflation rate to normalise in 2H17 (1H17: 4.0%) amid lower fuel prices and a waning low base effect. For the full year, we expect headline inflation to pick up to 3.6% in 2017, from 2.2% in 2016.

Overall, we see no motivation for BNM to alter current monetary policy stance this year as it balances firm economic growth trajectory against the benign inflationary environment. Together with the ringgit having stabilised and strengthened, there is no pressure for Bank Negara to alter course, hence our view of OPR staying at 3.0% this year.

The ringgit extended its gains after the decision. After strengthening by 0.2% for the whole month of August, the ringgit strengthened further in the first week of September and gained 0.6% yesterday, benefiting from strong exports and further stabilization of foreign reserves. Malaysia’s foreign reserves returned above the USD100bn mark as it increased by USD1.1bn to USD100.5bn as at 30 August from USD99.4bn as at end-July. It was also helped by the weaker USD.

USD/MYR saw a rapid downshift to 4.21 amid dollar weakness following dovish signals from the Fed ahead of the next FOMC meeting on 19-20 September. There was a sharp drop in USDMYR yesterday as the pair gapped lower in the open. USDMYR closed at 4.2110, a 10-month low. The move lower came amid an improvement in global risk appetite, continued improvement in sentiment for Malaysia risk assets since regulatory move back in mid-Apr, improving fundamentals (2Q GDP at 5.8% yoy, strong run in July exports at 30.9% yoy) and firmer oil prices amid soft USD environment. We think the persistent decline in USDCNY and USDSGD may also have been some of the factors weighing on the pair. Strong closings are signs that bears are in control, keeping downside pressure on USDMYR. Next support is at 4.20 before 4.18. Resistance at 4.25. However an escalation in geopolitical tensions in Korea should weigh on overall risk sentiment.

We are currently bearish on USD in the absence of new catalysts to drive further gains. The Dollar Index (DXY) remains below crucial resistance at 92.50 while bearish bias has picked up, thus we maintain a negative outlook.

Source: BIMB Securities Research - 8 Sept 2017