News

The MPC decided to raise the OPR by 25bps to 3.25%, in line our expectation and was predicted by 15 of 21 economists surveyed by Bloomberg.

The MPC said that recovery in the advanced economies resumed at a modest pace after moderating in 1Q14. Growth in Asia was supported by external improvements amid continued expansion in domestic demand. The MPC said global financial markets have remained stable.

The MPC said Malaysia will sustain its growth momentum with indicators pointing to continued strength in exports and private sector activity. Exports will lend support to growth while private sector demand is expected to remain robust.

On inflation, the MPC said inflation has stabilized in recent months as effects of subsidy removals moderates. Demand driven inflation remains contained. The MPC expected inflation outlook to remain above its long-run average due to domestic cost factors.

Comments

Comparing against the previous statement, there is virtually no change in BNM’s stance on growth and inflation outlook. BNM continued to remain optimistic on growth outlook with the support of export recovery and resilient private sector activity. On inflation outlook, BNM continued to expect moderate demand pressure but headline inflation will remain high due to rising cost.

BNM also explained that the OPR hike was aimed also to “mitigate risk of financial imbalances” which could weaken the path of sustainable growth.

From the policy statement, BNM has left its option open for further rate hike. Judging from previous statements, BNM will mention “current monetary stance is appropriate with outlook” if it is done with its rate hike/cut exercise.

At OPR of 3.25%, BNM said that monetary policy remains supportive of growth. With potential output and long-run inflation rate remaining unchanged, our estimation shows that neutral rate for Malaysia is around 3.50%. As such, we believe that BNM will pause for the time being to maintain its policy accommodation. BNM will need to be convinced of GDP growth will solidly stay above 5.5% with further build-up of financial imbalances (i.e. further divergence in household loan-deposit growth & rampant property speculation) before bringing the OPR to the neutral level.

On growth outlook, we maintain our 2014 GDP forecast at 5.5%, with quarterly GDP growth tapering off slightly due to higher base and fading of export boost inflation. On inflation, we expect 2014 full year CPI growth to average 3.2%, factoring in a 20 sen fuel price hike in Sep-14.

At this juncture, we believe BNM will stay pat in the Sep & Nov MPC meeting while evaluating the incoming data on growth, inflation, and financial data (i.e. property sector). This is premised on our baseline scenario that (i) quarterly GDP growth converging towards 5.5%; (ii) contained demand-driven inflation (i.e. mom CPI growth < 0.2% if no subsidy removal); and (iii) loan growth hovering around 10% level with a rebound in household deposit growth.

Source: Hong Leong Investment Bank Research - 11 Jul 2014