• BNM kept the OPR on hold at 3.00%
   
• BNM highlighted that the global economy remains expansionary underpinned by domestic demand and pick-up in external trade

• BNM foresees Malaysia’s economy to improve further amid external trade recovery and resilient domestic demand

• BNM expects inflation to remain moderate

• BNM stated that the currency was “currently undervalued”

• BNM to remain status quo through end-2024

Bank Negara Malaysia (BNM), kept the overnight policy rate unchanged at 3.00% as the country's economy continues to expand, thanks to resilient domestic demand and improved trade activities. This is the fifth straight MPC meeting in which BNM held the OPR level after hiking a cumulative 125bps in 2022-2023. The OPR was last raised by 25bps in May 2023 and subsequently kept unchanged from July 2023 until now.

The central bank said that at the current OPR level, its monetary policy stance remains supportive of the economy as it keeps an eye on the stability of the ringgit.

The tone of the Monetary Policy Statement (MPS) was also relatively unchanged from the previous meeting on 24 January.

Bank Negara Malaysia, in its MPS highlighted that the global economy continues to expand albeit moderately, supported by domestic demand amid positive labour market conditions, and improvement in trade activity. The MPS said that growth in regional economies is expected to improve and challenges in the property will result in modest economic recovery in China. The MPS reiterated that global trade will grow especially due to recovery in the global E&E sector. In terms of policy direction, central banks will likely move to cut rates in 2H24 as global inflation continues to ease, although the tight monetary policy will be kept for now as inflation remains elevated. BNM highlighted several downside risks to the global economy such as an escalation of geopolitical tensions, higher-than-anticipated inflation outturns, and volatility in global financial markets.

On domestic front, BNM anticipates Malaysia’s economy to improve further amid external trade recovery and resilient domestic demand. Domestic economic activities remain on expansionary momentum, supported by improving labor market conditions, steady income growth, higher tourist arrivals and realisation of multi-year and infra projects in both the private and public sectors. On the flip side, the downside risks to domestic economy stemming from weaker-than-expected external trade and larger declines in commodity production. Upside risks to growth mainly emanate from greater spillover from the tech upcycle, more robust tourism activity and faster implementation of existing and new projects.

The MPC statement also said that inflation is expected to remain moderate, broadly reflecting stable demand conditions and contained cost pressures. However, this outlook continues to be highly dependent on the implementation of domestic policy on subsidies and price controls, as well as global commodity prices and financial market developments.

Meanwhile, BNM states that given Malaysia's economic fundamentals and growth prospects, the ringgit is currently undervalued. The MPS reiterated that the government and BNM are taking “coordinated actions to encourage repatriation and conversion of foreign investment income” by government linked companies and government linked investment companies to shore up support for the currency. “Over the medium term, ongoing structural reforms will provide more enduring support to the ringgit”. The ringgit extended gains after the rate decision, and as of writing trading at 4.6980 against the dollar.

BNM said that "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".

BNM to remain status quo through end-2024

BNM left its benchmark interest rate unchanged, extending its wait-and-see stance as policymakers contend with a weaker currency amid looming inflation and economic growth risks. After a cumulative rate hike of 125bps normalising OPR to 3.0% in May 2023, we expect the benchmark interest rate to remain at 3.0% in 2024 on the back of 4.7% GDP growth with headline and core inflation continuing to trend downwards. Inflation in 2024 is expected to fall to 2.7%, within the range of 2.1% to 3.6% projected by the government. This is despite concerns about the inflationary impact from the winding back of government subsidies for key items like fuel and a service tax hike. Meanwhile, inflation held steady at 1.5% YoY in January, the same rate since November 2023 whilst core inflation rate was softer at 1.8% YoY. On the other hand, Malaysia's 4Q23 GDP growth was revised lower to 3.0% YoY from an advanced estimate of 3.4% (3Q23: 3.3%, 2Q23: 2.9%, 1Q23: 5.6%). For the full year of 2023, Malaysia’s economy expanded by 3.7% (2022: 8.7%), which was lower than official target (~4.0%). The ringgit remained pressured by weak confidence, fell to a 26-year low, briefly slipping past the 4.80 level against the dollar, prompting verbal intervention from the central bank. The USD/MYR pair though has since come-off. January’s inflation readings together with a softer real GDP growth for 4Q23 and persistent currency weakness reinforced our view that BNM will continue to stay the course in holding the OPR steady at 3.00% throughout 2024 while BNM remains mindful of external developments including the currency.

Source: BIMB Securities Research - 8 Mar 2024