• BNM maintains rate pause in September meeting
   
• BNM highlighted that the expansion in the global economy is expected to continue
   
• BNM maintained its optimistic view of Malaysia's domestic economy

• BNM highlighted a modest inflation outlook

• Bank Negara to maintain OPR at 3.00% for the rest of the year and into 2025

Bank Negara Malaysia (BNM) decided to maintain the Overnight Policy Rate (OPR) at 3.00% after the fifth Monetary Policy Meeting this year. This marks the eight successive meeting that the central bank kept the policy rate on hold since July 2023, the longest streak of rate paused since late 2020-early 2022. The OPR was last raised by 25bps in May 2023 and subsequently kept unchanged from July 2023 until now.

The central bank maintained a neutral tone on the monetary policy stance; 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.

In the Monetary Policy Statement (MPS), BNM highlighted that the expansion in the global economy is expected to continue, supported by positive labour market conditions, easing inflation and reduced monetary policy restrictiveness. BNM also reiterated that the global trade will continue to recover driven by increased external demand for both E&E and nonE&E products. BNM indicated that the downside risks to global growth outlook could come from heightened geopolitical tensions, volatility in global financial markets, and slower growth momentum in major economies. BNM added “slower growth momentum in major economies” as a new downside risk in the September statement replacing “higher-thanexpected inflation outturns” which was in the July statement. This suggests a shift in focus from higher inflation towards slower growth and we believe this may be linked to slower growth momentum in China and recent concerns over recession risk in the US.

On domestic front, BNM cited that growth would be underpinned by resilient domestic expenditure and robust export performance. Exports are projected to grow due to the global tech upcycle, considering Malaysia’s involvement in the semiconductor supply chain, and also the resilient growth in non-E&E segments. Improvement in tourism activities would encourage consumer spending which is supported by healthy labour market conditions and policy measures. Meanwhile, investment activity would be buoyed by the continued progress of multi-year projects, catalytic initiatives under the national master plans, and higher realisation of approved investments. Overall, BNM growth outlook remained neutral, citing "the growth outlook is subject to downside risks from lower-than-expected external demand, and commodity production”, while it sees upside risks from "greater spillover from the tech upcycle, more robust tourism activity, and faster implementation of investment projects”.

On the inflation, the central bank noted that the impact of diesel price adjustment on broader prices has been contained and both headline and core inflation are expected to stay within earlier projected ranges and are unlikely to exceed 3% for 2024. However, upside risk to inflation outlook remains, mainly driven by potential domestic policy measures.

There was also a paragraph on the MYR whereby BNM highlighted that “the recent recovery in the ringgit is driven by the shift in expectations of lower interest rates in major economies, particularly the US, as well as Malaysia’s strong economic performance. Looking ahead, Malaysia’s positive economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage flows, will continue to provide enduring support to the ringgit”. Moving forward, stable OPR with the expected US interest rate cuts is positive for Ringgit’s outlook amid recent stabilization.

Bank Negara to Maintain OPR At 3.00% For The Rest Of The Year and Into 2025

We are maintaining our view of OPR staying at 3.00% this year and into 2025. BNM is likely to keep a neutral bias pending further clarity on the fiscal direction and domestic policy measures to be unveiled during the Budget 2025. We believe BNM appears to be prioritizing domestic economic support while staying alert to inflation risk. Even with the commencement of global monetary policy easing towards year-end and into 2025, the strength of Malaysia’s domestic demand does not warrant any follow-through to cut rates while external demand is recovering albeit bumpy. The unchanged forward guidance provided by BNM since September 2023 is another signal that BNM remains comfortable with its current monetary settings and the current assessment does not require any changes in its monetary policy settings just yet. Risks to Malaysia’s growth and inflation outlook in 2025 remain benign as BNM retains its data dependent stance pending clarity on the timing and quantum of RON95 petrol price adjustments and transfer mechanism measures. On the other hand, potential downside risks to domestic growth could emanate from a weaker-thanexpected global economy post US presidential election as well as China’s challenging growth outlook, the recent escalation in geopolitical risks in the Middle East and Europe, stickier inflation and a more gradual rate easing cycle.

Source: BIMB Securities Research - 6 Sept 2024