• BNM holds OPR at 3.25%

• Growth to remain strong in 2018

• Inflation to average lower in 2018

• OPR to remain at 3.25% in 2018

The Monetary Policy Committee (MPC) of Bank Negara Malaysia has decided to maintain the Overnight Policy Rate (OPR) at 3.25% on March 7th 2018. BNM said the decision is in line with the policy stance to ensure that domestic economy continues on a steady growth path amid lower inflation. Previously on 25th January this year, BNM raised its key rate by 25bps to 3.25% from 3.0%. It was the first rate hike in 3-1/2 years.

The overall tone of the statement was neutral, reaffirming our view for the OPR to remain unchanged for the rest of the year. BNM kept a balanced view such that despite renewed signs of emerging volatility and rising trade tensions, they expect continuity in global economic expansion. At this juncture, BNM continues to see balanced risks to the global outlook. Furthermore BNM kept a positive view on the domestic economy and reiterated that inflation is expected to moderate in 2018.

OPR to remain at 3.25% in 2018

BNM kept its policy rate on hold at 3.25% following a hike at its last meeting in January. With inflation slowing, growth likely to cool further and with the strong ringgit, we doubt that BNM will tighten again this year.

Headline inflation rose by 2.7% yoy in January, lowest in 13 months and in line with slowing inflation trend of most of the goods and services. Meanwhile, core inflation maintained at 11-month low at 2.2% yoy in January. As for 2018, we foresee inflation to slow down to 2.5%-3.0% yoy amid of unfavorable base effects.

Meanwhile, the economy has cooled. Growth slowed in 4Q17 to 5.9% yoy from 6.2% in 3Q17 and is set to ease further in 2018. We forecast an economic growth of 5.3% for 2018 partly due to unfavorable base effects. While it should still keep a decent pace this year with domestic demand will continue to drive growth supported by favorable income and labor market conditions, spending on new and ongoing infrastructure projects and sustained capital investment by firms in the manufacturing and services sectors, the boom in exports that drove growth to a three-year high in 2017 is unlikely to be repeated as we continue to factor in the high base effect to weigh on export growth.

Therefore, we maintain our year-end OPR projection of 3.25% in 2018 unless there are upside surprises to growth and inflation as compared to our forecasts of moderating real GDP growth (2018: 5.3%) and easing inflation (2018: 2.5%-3.0%). The sustained ringgit appreciation trend should mitigate the spillover of rising global commodity prices. Furthermore, stronger ringgit alongside the interest rate hike means tighter monetary conditions, and the monetary policy normalization needs to balanced against the continued fiscal consolidation as the budget deficit for this year is targeted to be lower at -2.8% of GDP. What would prompt a change in our view is if incoming data suggest that growth could overshoot official forecasts of 5.0%-5.5%, together with persistence in or upside risk to inflation, on top of aggressive and synchronized monetary policy normalization by the major central banks. For now, we maintain our year-end OPR projection of 3.25%.

Source: BIMB Securities Research - 8 Mar 2018