Monetary Conditions

Monetary conditions remained largely stable in July. Broad money supply (M3) growth inched up to 5.7% yoy (Jun: +5.6% yoy) while that of narrow money (M1) dipped to 9.1% yoy (Jun: +10.2% yoy). Growth of loan disbursements more than halved to 5.1% yoy (June: +10.5% yoy), dragged down by household segment. BNM foreign reserves lowered by US$0.1bn to US$131.8bn in July (Jun: +US$1.0bn).

The broadly unchanged monetary conditions reaffirm stable domestic economic activity in July. However, the moderation in M1 growth, if sustained, could signal weakening of domestic growth momentum. We maintain our growth forecast of 6.0% for this year, with 2H GDP growth slowing to 5.6% from 6.3% in 1H, largely due to higher base a year ago and diminishing net export boost.

Loan & Deposit

Household loan-deposit gap narrowed in July. Household loans slowed to 11.1% yoy (Jun: +11.5% yoy) while household deposit growth rose to 6.4% yoy (Jun: +5.9% yoy). The smaller gap may be attributed to the effect of the 25bps OPR hike in July. Nevertheless, the still wide household loan-deposit growth gap reflects some disequilibrium in broad interest rates.

Notwithstanding the strong residential property loan growth (+13.5% yoy; Jun: +13.6% yoy), loan applications for such purpose contracted 17.5% yoy (Jun: +0.3% yoy), implying that households adopted wait-and-see attitude towards house purchase following the 25bps rate hike.

Business credit growth slowed to 6.8% yoy (Jun: +7.2% yoy), partly affected by higher interest rate payments ahead. In contrast, net issuance of PDS rose to RM3.8bn (Jun: RM3.5bn), bringing the cumulative net issuance of PDS in Jan-Jul to RM18.5bn (Jan-Jul 2013: RM7.2bn).

The slower loan growth, decline in loan applications and signs of normalization of household loan-deposit behaviour have reduced the probability of OPR hike on 18 Sep. External conditions have also recently turned weaker (i.e. Euro area). The upcoming July trade and IPI data before the Sep MPC Meeting could provide clue on the degree of GDP growth tapering into 2H. At this juncture, we still expect BNM to raise the OPR by 25bps on 18 Sep given (i) overall stable monetary conditions; (ii) full-year GDP growth to surpass official forecast of 4.5-5.5%; and (iii) need to anchor inflation expectation given potential subsidy removal & GST implementation in the near-term.

Liquidity

Excess liquidity in the banking system remained ample even though the current level of RM237.9bn as at end July (Jun: RM237.7bn) has been trending below the 2010-2013 average level of RM267.1bn. Deposit-loan gap widened to RM299.3bn (June: RM291.6bn).

In July, foreigners pared down Malaysian equities but loaded up debt securities. They turned to a net seller of RM0.3bn Malaysian equities from a net buyer of RM0.5bn in June (May: +RM3.0bn). On debt securities, overseas investors raised their holdings by RM9.1bn to RM257.2bn in July (June: -RM1.3bn to RM248.2bn).

Source: Hong Leong Investment Bank Research - 2 Sep 2014