• BNM kept the OPR on hold at 3.00% 
   
• BNM remains sanguine over both global and domestic economic growth prospects
   
• BNM said the latest indicators point towards higher economic activity in the first quarter of 2024

• BNM expects inflation to remain moderate

• BNM reiterated that the current ringgit movement does not reflect Malaysia’s economic fundamentals and growth prospects

• We maintain our end-2024 OPR forecast of 3.00%

Bank Negara Malaysia (BNM), extended its policy pause to a year and kept the overnight policy rate (OPR) unchanged at 3.00%, as it keeps a watchful eye on growth and inflation. This is the sixth 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 continued to indicate that the current OPR of 3.00% remains supportive of the economy and is consistent with its assessment of the inflation and growth prospects.

The tone of the Monetary Policy Statement (MPS) was also relatively unchanged from the previous meeting in March but the key change in the latest MPS was regarding the global monetary policy stance where BNM posit the prospects of interest rates staying higher for longer, particularly in the US, due to a slowdown in the pace of disinflation amid resilient labour markets.

Bank Negara Malaysia, in its MPS highlighted that the global economy continues to expand amid resilient labour markets in some countries and continued recovery in global trade. It added that global growth is expected to be sustained, as headwinds from tight monetary policy and reduced fiscal support will be cushioned by positive labour market conditions and moderating inflation. Global trade is expected to strengthen further as the global tech upcycle gains momentum. The growth outlook remains subject to downside risks, mainly from further escalation of geopolitical tensions, higher-than-anticipated inflation outturns, and volatility in global financial markets.

On domestic front, BNM said that the latest indicators point towards higher economic activity in the first quarter of 2024, driven by resilient domestic expenditure and a positive turnaround in exports. Going forward, it said the recovery in exports is expected to gather momentum supported by the global technology upcycle and continued strength in nonelectrical and electronics goods. Tourist arrivals and spending are also poised to rise further. The central bank added that the continued employment and wage growth remains supportive of household spending while investment activity would be supported by the ongoing progress of multiyear projects in both the private and public sectors, the implementation of catalytic initiatives under the national master plans, as well as the higher realisation of approved investments. The growth outlook is subject to downside risks from weaker-than-expected external demand, and larger declines in commodity production whilst upside risks to growth mainly emanate from greater spillover from the technology upcycle, more robust tourism activity, and faster implementation of existing and new projects.

The MPC statement also said that inflation in 2024 is expected to remain moderate, broadly reflecting stable demand conditions and contained cost pressures. The outlook for the rest of the year is dependent on the implementation of domestic policy on subsidies and price controls, as well as global commodity prices and financial market developments. After incorporating the potential impact of subsidy rationalisation, headline and core inflation are projected to average between 2% and 3.5% and 2% and 3% for the year respectively.

BNM pointed out that the ringgit currently does not reflect Malaysia’s economic fundamentals and growth prospects. External factors, namely shifting expectations of major economies’ monetary policy paths and ongoing geopolitical tensions, have led to heightened volatility in both capital flows and exchange rates across the region, including the ringgit. The coordinated initiatives by the government and BNM with government-linked companies and government-linked investment companies, and corporate engagements, have gained further traction, cushioning the pressure on the ringgit. BNM said it will continue to manage risks arising from heightened financial market volatility. Over the medium term, domestic structural reforms will provide more enduring support to the ringgit.

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

We remain cautiously optimistic about growth prospects in 2024. Domestic factors including the government’s commitment to infrastructure spending and resilient labor market will be complemented by a bottoming in the global electronics export downcycle. In addition, the authority’s commitment to fiscal consolidation and medium-term reforms will support investor sentiment. The timeline and mechanism of introduction of targeted fuel subsidies is expected to be announced by end-June. Inflation will also be impacted but likely remain manageable. Given our optimistic growth forecast, the BNM is expected to uphold its current policy rate of 3.00% in 2024 while BNM remains mindful of external developments including the currency. Rate cuts are unlikely due to concerns about inflation while there is no reason to hike the rates as rate hike is not a solution to support the currency, particularly given the broad USD strength.
 

Source: BIMB Securities Research - 10 May 2024