News

• BNM extended its OPR pause at 3.25% for the seventh successive meeting, in line with our and market estimates.
• The MPC continued to highlight mounting concerns about global economic growth and financial volatility, concurring with both IMF and World Bank’s view of rising unc ertai nty over growth in China and falling commodity prices.
• On domestic economy, BNM opined that risks to growth have tilted to the downside, however, continued domestic demand growth would be able to cushion weakness in the external sector. Despite further adjustment to GST and highly uncertain economic environment, local growth momentum will be underpinned by wage growth, stable employment and ongoing infra projects.
• Inflation expectations would stay tame, limited by tumbling global energy prices and low global inflation atmosphere.

Comments

• We opine that the tone of latest MPS sounded slightly more dovish, as risks from slowing Chinese economy had risen since August. Global financial volatilities re-emerged recently, introduced by policy changes by the PBOC (yuan devaluation, rate cuts and reduction in US T-Bill holdings). The uncertainty of Fed rate liftoff and discussion of potential wind down of Fed balance sheet also created another fear of possible drain in global market liquidity.
• While the MPC discussed various sources of downside risks in length, it continued to express confidence on economic fundamentals and concluded that GDP growth would fall within the targeted range of 4.5-5.5%.
• From the MPS, the MPC believed that MYR is undervalued. It opined that MYR will reflect the underlying fundamentals of the economy when both external and domestic uncertainties recede. The MPC also comforted the market that domestic liquidity remains ample to support financial intermediation.
• On GDP, we expect economic growth to dip further to 4.8% in 3Q before recovering to 5% in 4Q, concluding the year with 5% growth. Both exports and investment continue to remain subdued due to softening global demand and uncertainty in MYR trend. There is also no sign of signi ficant pick-up in consumption (i.e. dismal rise in M1 and declining car / property sales).
• We maintain our 2015 full -year inflation estimate at 2.5%, with risks skewing to the downside. Impact of lower fuel prices is likely to more than offset the adverse impact of imported inflation via weaker MYR. We expect core inflation to remain modest, consistent with more moderate growth in domestic demand.
• Notwithstanding the heightened downside risks, all major indicators (growth, inflation and financial intermediation) are likely to stay within the targeted zone of BNM. As such, we expect BNM to prolong its pause of OPR at 3.25%. We do not foresee the need for BNM to loosen its monetary policy as it will disrupt market perception about domestic growth prospects and worsen MYR volatility.

Source: Hong Leong Investment Bank Research - 14 Sep 2015