• BNM holds OPR at 3.25%

• MPS maintained neutral tone

• Economy will continue to expand at a moderating pace in 2018

• Unchanged OPR beneficial to Malaysia

The Monetary Policy Committee (MPC) of Bank Negara Malaysia kept the Overnight Policy Rate (OPR) unchanged at 3.25% at its fifth monetary policy meeting this year. The central bank kept a neutral tone on monetary policy but more cautious on the growth outlook.

In its monetary policy statement (MPS), the policymakers said the economy maintains its underlying fundamental strength, with steady economic growth, low unemployment and a current account surplus but however downside risks stem from trade tensions, prolonged weakness in the mining and agriculture sectors and some domestic policy uncertainty.

Unchanged OPR beneficial to Malaysia

The unchanged OPR of 3.25% by Bank Negara Malaysia would be beneficial for the Malaysian economy as it faces a globally volatile second half of the year. Despite further capital outflows in August amid the rout caused by spill overs from turmoil in emerging markets (EM) such as Turkey and Argentina, as well as trade war tensions and less accommodative G3 monetary policy, domestic financial markets remain stable. From our point of view, local equities look attractive from dividend yield perspective and they are also trading at premium valuations versus some Asian stocks. An unchanged OPR will be beneficial as it paints a picture of stability and will help to bring in local and international investors alike.

The central bank will hold the final monetary policy meeting for this year on Nov 8, 2018 and we expect the OPR to stay unchanged at 3.25%. The central bank has been on hold since it hiked once in January and given lingering volatility and pressures on the economy, we think any changes to the OPR is a tough one to make. We believe that Bank Negara has ample room to keep policy unchanged, despite an emerging-market sell-off that forced some of the regional central banks like Indonesia, the Philippines and India to take more aggressive steps in hiking the interest rates in a move to address inflation and capital outflow. With inflation running at just 0.9% yoy, pressures continue to ease compared to the peak of inflationary pressure that hit 5% about a year and a half ago.

Source: BIMB Securities Research - 6 Sept 2018