• BNM kept the OPR on hold at 3.00% in last MPC meeting of 2023

• BNM foresee growth in 2024 to be driven mainly by resilient domestic expenditure

• BNM sees further moderation in inflation pressure in 2024

• BNM to hold OPR at 3.0% through end-2024

Bank Negara Malaysia (BNM), in its final Monetary Policy Committee (MPC) meeting of the year, maintained the benchmark OPR at 3.0% for the third consecutive meeting. BNM resisted the urge to follow the hawkish trend seen in neighbouring countries amidst cooling price pressures and concerns about a weakening ringgit. The MPC had only one rate hike this year in May when it decided to raise the OPR by 25bps from 2.75% to 3.0%. BNM had raised OPR by a modest 125bps in the current cycle but will keep rates higher for longer as the weak ringgit may prevent inflation from falling quickly.

At the current OPR level, the central bank said the monetary policy stance remains supportive of the economy and is consistent with the current assessment of the inflation and growth prospects.

In its Monetary Policy Statement (MPS) Bank Negara said the global economy continues to expand, driven by domestic demand amid strong labour market conditions. Some signs of recovery are emerging in the electrical and electronics (E&E) sector, but global trade remains soft partly due to the shift in spending from goods to services, and ongoing trade restrictions. Global growth remains weighed down by persistently elevated inflation and higher interest rates, with several major economies experiencing slowing growth momentum. There are early signs of improvement in China's growth, though its property market remained weak. Global headline inflation edged up partly due to higher commodity prices, while core inflation continued to moderate. For most central banks, the monetary policy stance is likely to remain tight. The growth outlook remains subject to downside risks, mainly from higher-thananticipated inflation outturns, an escalation of geopolitical tensions, and a sharp tightening in financial market conditions.

On domestic front, BNM highlighted that the advance gross domestic product (GDP) estimate points to an improvement in economic activity in the third quarter. BNM said "Growth in 2024 will be driven mainly by resilient domestic expenditure, with some support emanating from the expected recovery in electrical and electronic (E&E) exports". According to the Bank Negara, continued employment and wage growth remain supportive of household spending. Meanwhile, it said tourist arrivals and spending are expected to improve further. "Investment activity would be supported by continued progress of multi-year infrastructure projects, and implementation of catalytic initiatives under the national master plans. Measures under Budget 2024 will also provide additional impetus to economic activity".

As expected, both headline and core inflation have moderated, mainly due to easing cost pressures. In 3Q23 , headline and core inflation averaged at 2.0% and 2.5%, respectively. BNM dropped the “persistence of core inflation as a price risk” and this was replaced with demand conditions and the government’s price controls and subsidy review as key uncertainties for inflation in 2024. “Going into 2024, the central bank said inflation is expected to remain modest. Of note, the government's intention to review price controls and subsidies in 2024 will affect the outlook for inflation and demand conditions”.

On the expectations of a higher-for-longer interest rate environment in the US, and increased concerns over the escalation of geopolitical tensions have contributed to a persistently strong US dollar. "This has affected other major and emerging market currencies, including the ringgit. Nevertheless, these developments are not expected to derail Malaysia's growth prospects. Bank Negara Malaysia will continue to manage risks of heightened volatility, including to provide liquidity, to ensure the orderly functioning of the domestic foreign exchange market".

Bank Negara noted at the current OPR level, the monetary policy stance remains supportive of the economy and is consistent with the current assessment of the inflation and growth prospects. “The MPC remains vigilant to ongoing developments to inform the assessment on the outlook of domestic inflation and growth. The MPC will ensure that the monetary policy stance remains conducive to sustainable economic growth amid price stability”.

The meeting also approved the schedule of MPC meetings for 2024. In accordance with the Central Bank of Malaysia Act 2009, the MPC will convene six times during the year.

Source: BIMB Securities Research - 3 Nov 2023