• BNM keeps OPR unchanged at 2.75%
• BNM sounds more cautious about inflation, rather than growth
• Economy to moderate in 2023 amid slower global growth
• Inflation to moderate but remain elevated
• Further policy moves depend on growth, CPI outlook
• Expect OPR normalization to resume in 2H23

Bank Negara Malaysia (BNM) maintained the OPR at 2.75% in its second Monetary Policy Meeting of 2023 as the central bank opted to weigh the impact of previous interest-rate increases on economic activity amid a challenging global outlook.

In the Monetary Policy Statement, BNM highlighted that the global economy continues to be pressured by escalation of geopolitical tensions, higher-thanexpected inflationary pressure and sharper tightening of financial market conditions. Central banks across the globe to continue embarking contractionary monetary policy even though with slower pace as to manage inflationary pressure particularly driven by resilient domestic demand. The central bank also highlighted positive developments from China’s reopening and better performances of domestic demand in major countries.

On the local front, BNM is of the view that the implementation of projects from the re-tabled Budget 2023 will provide upside risks to the domestic growth outlook, which the government projects to moderate to 4.5% this year from a record 8.7% in 2022. Domestic demand will remain the key growth engine. Household spending continue to be supported by improving labour market conditions and steady income growth. BNM also highlighted investment prospects to be supported by the realisation of multi-year and infra projects and further pickup in tourism-related activities. This comes in the midst of rising external downside risks. On downside risks, BNM highlighted on weaker-than-expected global growth, higher risk aversion in global financial markets, aggressive tightening of monetary policy in major economies, escalation of geopolitical conflicts and supply chain disruptions.

On inflation, BNM foresee headline and core inflation to moderate but remain at elevated levels amid lingering demand and cost pressures. The current inflation pressure is partly absorbed by existing price controls and fuel subsidies, as well as the remaining spare capacity in the economy. This is expected to bring headline and core inflation down further over the course of the year but to remain at an elevated level. The risks to inflation are much dependent on domestic policy on subsidies and global commodity price developments.

BNM said in a statement that at the current OPR level, the stance of monetary policy remains accommodative and supportive of economic growth. It said the MPC will continue to assess the impact of the cumulative OPR adjustments, given the lag effects of monetary policy on the economy. It also said the MPC remains vigilant to cost factors, including those arising from financial market developments, that could affect the inflation outlook. Further normalization to the degree of monetary policy accommodation would be informed by the evolving conditions and their implications to the domestic inflation and growth outlook.

Expect OPR normalization to resume in 2H23

BNM left the overnight policy rate unchanged at 2.75% but in our view, March’s monetary policy statement sent a slightly more positive tone than January’s statement. The central bank reiterated that further adjustments to its policy setting would depend on the evolving outlook for growth and inflation. However, BNM sounds more cautious about inflation, rather than growth. The central bank is now flagging upside risks to the growth outlook, unlike before, stemming from the new government’s fiscal support in its budget for 2023. It also dropped reference to a previously-cited growth risk - from supply chain disruptions - which appears related to China’s reopening. BNM continues to reference downside risks from weaker global growth and tighter financial conditions.

In its forward guidance, BNM added a new line that “the MPC remains vigilant to cost factors, including those arising from financial market developments that could affect the inflation outlook”. Both headline and core inflation decelerated in January, but BNM did not acknowledge this progress in its March policy statement.

BNM also continued to signal that further normalisation of monetary policy would depend on the evolving conditions, but there was no guidance on timing or magnitude of potential changes. As such, we see the central bank on hold through the 1H23 since it will take time to assess the impact of some large crosscurrents - the boost from China’s reopening and fiscal stimulus versus the drag on local and global demand from past monetary tightening. Recent softening in Malaysia’s inflation also gives BNM more room to wait. Still, we continue to expect one more 25bps hike to 3.00% at the next policy meeting in July. Thereafter, the central bank may then keep rates on hold for the rest of the year.

Source: BIMB Securities Research - 10 Mar 2023