• BNM holds OPR at 3.25%
• MPS maintained neutral tone
• Economy expected to remain on a steady growth
• BNM has ample room to stand pat

The Monetary Policy Committee (MPC) of Bank Negara Malaysia kept the Overnight Policy Rate (OPR) unchanged at 3.25% at its fourth monetary policy meeting this year as growth remains firm and inflationary pressures weakened after the new government removed a much-maligned Goods and Services Tax (GST).

BNM has ample room to stand pat

In the first policy meeting chaired by new Governor, Datuk Nor Shamsiah Mohd Yunus, BNM kept its key interest rate at 3.25%. Low inflation and the need to support growth in deteriorating global trade environment were the reasons for the central bank to leave its benchmark interest rate unchanged.

Malaysia’s domestic fundamentals still provide room for BNM to stand pat. In its statement the central bank said “the Malaysian economy is expected to remain on a steady growth path”. A looming trade war between the US and China could see some slowdown in some sectors. For now, growth forecasts remain solid at over 5.0% for this year. Although there is a risk of the trade war worsens, we are maintaining our 2018 growth forecast of 5.3%.

Inflation has turned out to be a lot more benign than what the central bank had predicted. For the first five months, CPI increased by 1.7% compared to 4.1% in the same period last year. As such, the prevailing inflation rate trajectory is lower than the 2018 forecast. The zero-rated GST should translate into lower inflation in the 2H18. Additionally, the provision of fuel subsidy would keep a lid on petrol prices for the rest of the year. We expect headline inflation to moderate to 2.0% in 2018 (2017: +3.7%). The lower inflation expectation was premised on the reinstatement of fuel subsidies, lower prices amid the zero-rating of the GST and a persistently weak food price growth trajectory. Withholding the impact of the SST’s implementation for now until more definite details are available, we will closely monitor the development of the regime to assess the expected full-year inflation rate for 2018 as there is a likelihood that inflation may come in even lower than our forecast for this year.

Further, the ringgit has fared better than its peers amid an emerging market sell-off supported by higher oil prices which have bolstered inflows and strengthened the currentaccount surplus. The ringgit is up about 0.4% against the USD this year, compared with a 7.0% slump in the Philippine peso and a 5.8% decline in the Indonesian rupiah. The ringgit will continue following a broader market tone but with a lower volatility as the nation’s massive current account surplus and bouncing oil prices provide a buffer amid portfolio outflows.

With the external environment becoming increasingly uncertain, the BNM maintained status quo on monetary policy. At the current interest rate, BNM said that “the degree of monetary accommodativeness is consistent with the intended policy stance”.

Benign inflation, steady strong growth, and a resilient ringgit prevent the need for the BNM to follow the Fed's policy tightening. 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 feel that BNM can maintain the current OPR at 3.25% throughout 2018 to support the domestic economy.

Source: BIMB Securities Research - 11 Jul 2018