• BNM maintains rate pause in November meeting

• BNM maintained its optimistic view of Malaysia's domestic economy and said latest indicators point towards sustained strength in economic activity

• Growth outlook was subject to downside risks from lower-than-expected external demand and commodity production

• BNM noted inflation has been modest and is expected to stay manageable in 2025

• Bank Negara to maintain OPR at 3.00% in 2025

Bank Negara Malaysia (BNM) maintained the overnight policy rate (OPR) at 3.0% following the conclusion of its final Monetary Policy Committee (MPC) meeting for this year. This marks the ninth successive meeting that the central bank kept the policy rate on hold and this decision follows a series of rate hikes in 2022-2023 aimed at containing inflation, though BNM now sees growth as vulnerable due to external pressures, like China’s economic slowdown and potential headwinds from U.S. monetary policy

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 global economies continue to grow, supported by strong labor markets and a sustained recovery in global trade. BNM reiterated its expectation of a rebound in global trade driven by rising demand for both electrical and electronic (E&E) products as well as non-E&E commodities. Consistent with its previous statements, BNM noted potential downside risks to global economic growth, including escalating geopolitical tensions, increased financial market volatility, and weaker growth in key economies.

On domestic front, assessment generally remains unchanged except that the line “Budget 2025 measures will provide additional support to growth” has been added. BNM stated that the latest indicators point towards sustained strength in economic activity driven by resilient domestic expenditure and higher export activity. Exports should see further gains from the global tech upcycle, robust non-E&E sectors, and increased tourist spending. Meanwhile, investment activity would be buoyed by the continued progress of multi-year projects, catalytic initiatives under the national master plans, higher realisation of approved investments as well as consumption and investment related measures unveiled in the Budget 2025. The central bank said its growth outlook was subject to downside risks from lower-than-expected external demand and commodity production. In comparison, the upside to growth outlook could come from stronger tech upcycle, more encouraging activity in the tourism sector and better progress in the investment projects.

On the inflation, the central bank noted inflation has been modest and is expected to stay manageable in 2025, with downside risks from external demand and commodity production. BNM reiterated its concerns over the potential impact of domestic policy changes planned for next year as it will play a pivotal role in shaping the inflation outlook.

On the MYR, BNM commented that the currency performance continues to be primarily driven by external factors. The outcome of the US elections could heighten volatility in the near term. Looking ahead, the narrowing interest rate differentials between Malaysia and the advanced economies is positive for the ringgit.

Bank Negara to maintain OPR at 3.00% in 2025

We are maintaining our view of OPR staying at 3.00% in 2025, depending on the progress of subsidy reforms and inflation trends. We believe BNM appears to be prioritizing domestic economic support while staying alert to inflation risk. The economy will continue to grow and will be well supported by ongoing multiyear infrastructure projects and business-friendly policies and incentives targeting priority sectors. While the impact of recent policy changes on inflation has been moderate, we expect that next year’s primary inflationary drivers will stem from supply-side factors, given the still modest underlying price pressures and relatively low core inflation. However, BNM retains ample flexibility to adjust monetary policy if future economic slowdowns arise. Despite rate cuts by many central banks, we do not anticipate BNM easing its monetary policy simply to align with these trends. Instead, adjustments to the OPR will be determined by Malaysia’s domestic economic conditions and inflation developments. We expect BNM to remain cautious about rate changes, especially with ongoing subsidy rationalization in Malaysia potentially driving price pressures. The central bank has little to worry on the currency front as the narrowing interest rate differentials between the US and Malaysia will continue to act as a tailwind for the Malaysian ringgit. That being said, a Trump victory in the US elections is a key risk to our positive outlook on MYR.

Source: BIMB Securities Research - 7 Nov 2024