Monetary Conditions

Money supply growth trended lower in May, with M3 growth softened to 5.5% yoy (Apr: +6.0% yoy), the slowest in almost five years. Meanwhile, M1 (mainly for transaction needs) growth dipped to 9.6% yoy, the first single-digit mode in 18 months (Figure #1). In May, loan disbursement growth slowed to 4.8% yoy (Apr: +15.3% yoy) while BNM reserves declined by US$0.3bn (Apr: +US$1.0bn).

The more moderate money supply growth suggests that domestic economic activity had softened in Apr-May after a strong start in 1Q14 GDP (+6.2% yoy). We maintain our 2014 GDP forecast at 5.5%, with quarterly GDP growth tapering off due to higher base and fading of export boost.

Loan & Deposit

Household loan growth inched up slightly to 11.8% yoy while household deposit trended lower to 5.9% yoy (Apr: +6.7%). The divergence between household loan and deposit growth continued to widen (Figure #3), which could imply that broad interest rates are no longer at equilibrium. BNM may need to step in to correct the impact of negative real interest rates to prevent structural change in consumer’s risk-taking behavior.

Loan growth for purchase of residential properties remained strong (+13.6% yoy). Contrary to our expectation, loan application for such purpose rebounded to grow by 9.7% yoy or 4.4% mom. This phenomenon, if persists, could suggest that impact of property measures in late-2013 has dissipated. This development also lends support to our call for a July OPR hike to re-align broad interest rate levels.

Business loan growth moderated to 7.9% yoy (Apr: +8.6% yoy). Meanwhile, the PDS market recorded a net redemption of RM2.5bn after eight consecutive months of net issuance (cumulative of RM29.3bn).

With the stronger-than-expected 1Q GDP growth, we believe the case of an early rate hike is now justified. Moreover, domestic demand growth did not slow down as envisaged while the construction sector received more boosters primarily from the residential sector.

Reinforced by the hawkish MPS, we expect BNM to hike the OPR by 25bps in its July MPC meeting. We expect BNM to stay pat thereafter to assess the evolution of growth, inflation and financial data related to the property sector.

Liquidity

Excess liquidity in the banking system was slightly lower but remained ample in May. Deposit-loan gap edged lower to RM292.6bn (Apr: RM297.4bn) (Figure #4). Meanwhile, surplus liquidity (New Liquidity Framework) also declined to RM122.3bn as at end-May from RM127.8bn the prior month (Figure #6).

Notwithstanding expectations of an imminent rate hike, foreign holding of debt securities rose RM13.5bn to a record high of RM249.5bn (Apr: RM235.9bn), driven by higher foreign holding in all type of instruments, i.e. MGS (+RM9.2bn to RM144.7bn); BNM bills (+RM1.9bn to RM50.8bn) and BNM Islamic notes (+RM1.6bn to RM31.5bn).

Source: Hong Leong Investment Bank Research - 1 Jul 2014