• BNM raises the OPR by 25 basis points to 2.75%, as expected

• Diminishing effects of COVID-19 necessitate further adjustment

• Downside risks to growth persist, however

• Headline and core inflation are expected to remain elevated

NOVEMBER POLICY DECISION

Bank Negara Malaysia (BNM) during its final Monetary Policy Meeting (MPC) of the year decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 2.75%, a decision that was in line with our and consensus estimates. The move was driven, among others, by steady 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 (September 2022 unemployment rate: 3.7%), an increase in labour force participation (September 2022: 69.7%) and better income prospects. Output is also expected to be lifted by expansionary Fiscal Budgets 2022 and 2023, 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) and therefore, 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 following the government drive to source migrant workers from 16 countries. This will be further spurred by the strategic decision to open the international borders (from April) on the back of a full year impact next year - a huge boost for services sector (i.e., tourism, accommodation, leisure, retail). Favourable external conditions, massive pro-growth measures in Fiscal Budget 2022/23, will push economic activity to rebound sharply in 2022 (+6.2%) and 2023 (+4.0-4.5%) respectively.

Risks to growth may however come from COVID-19 outbreak incidences which may lead to pockets of containment measures (note: Variant-of-Concern - VoC; e.g., XBB – sub-variant of Omicron). Supply chain disruptions given raw material shortages (e.g., chips, shipping container) could also affect our prospects. 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 which could continue in the immediate term is also a worry as it could dent the prospect 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.

Source: BIMB Securities Research - 3 Nov 2022