• BNM raises the OPR by 25 basis points to 2.50%

• Diminishing effects of COVID-19 necessitate the adjustment

• Downside risks to growth persist

• Headline and core inflation are expected to trend higher

• Policy paucity for remaining of the year

SEPTEMBER POLICY DECISION

Bank Negara Malaysia (BNM) decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 2.50% in its 5th policy meeting of the year, a decision that was in line with our and consensus estimates. The move was driven, among others, by improving growth prospects thanks to sustained recovery in domestic demand and external conditions. Labour market was also healing well, reflected in a steady drop in unemployment level, an increase in labour force participation and income prospects. Output was also lifted by expansionary Fiscal Budgets 2021 and 2022, following double-digit YoY increases for the Development Expenditure (DE). Above all, the adjustment was pushed by the diminishing effect of COVID-19 pandemic and therefore, the gradual withdrawal of policy accommodation.

Malaysia’s growth trajectory is set to recover further, evidenced by the steady turnaround in high frequency indicators (i.e., CPI, IPI, trade, PMI Manufacturing), encouraging prospects that are expected to take hold in the near term. This will be further pushed by favourable external conditions thanks to full economic openings around the world especially in major economies (US, Eurozone, ASEAN). This, along with a lag impact of expansionary global fiscal strategy in 2021 and accommodative policy stance amid measured steps in normalizing policy rates around the world will push demand for our key export especially manufacturing, mining and agriculture goods.

Output will also get a lift from the resolve to address labour shortage issue facing key sectors such as services, manufacturing and agriculture. This will be further spurred by the strategic decision to open the international borders (from April) - a huge boost for services sector (i.e., tourism, accommodation, leisure, retail). Favourable external conditions, massive pro-growth measures in Fiscal Budget 2022, and the lag impact of eight fiscal stimulus programmes in 2021 will push economic activity to rebound sharply in 2022 (+6.2%; 2021: +3.1%).

Risks to growth may however come from COVID-19 outbreak incidences which may lead to pockets of containment measures. Supply chain disruptions given raw material shortages (e.g., chips, shipping container) could also affect our prospects. Persistent emergence of Variance-of-Concern (VoC) is another risk factor. The protracted Russia-Ukraine conflict could also bite given the disruption in global commodity markets and therefore, downside risks to global growth. Strict China COVID-19 lockdown policies is also a worry as it may dampen the full turnaround of manufacturing and trade sectors. Tight financial conditions and hence, volatility in Ringgit and financial markets could also backfire though this is expected to ease next year. All these could weigh on growth potential.

POLICY OUTLOOK: POLICY PAUCITY FOR NOW

Economic momentum is set to gain more traction in 2022 following a lag impact of expansionary fiscal and monetary strategies. This will also be aided by full economic openings given our move into the endemic stage since April. This positive development could underpin a nascent recovery in contact-sensitive service-related sectors like airlines, land transport, hotels & restaurants, entertainment & theme parks, medical tourism and travel agents, a muchneeded lifeline for these sub-sectors which have been affected by the COVID-19 pandemic. Economic activity will also be spurred by sustained output generation by manufacturing, mining and agriculture thanks to full economic openings in key regions, improvements in global pandemic conditions and rapid structural adjustment in global telecommunication sector. Economic momentum will also be driven by favourable external conditions thanks to vaccine-induced recoveries around the world. Other growth drivers may come from various initiatives including rapid job creation and the reopening of international borders beginning April. All these could be a precursor for further withdrawal of policy accommodation though we believe BNM may pause the adjustment in the final policy meeting of the year in November given the tabling of Budget 2023 in early October.

Source: BIMB Securities Research - 9 Sept 2022