News

• As expected, the MPC ended the year with an unchanged OPR of 3.25% for the eighth straight meeting.
• While downplaying the international financial volatility, the MPC continued to be very mindful of the heightened risks in the global economic and financial environment arising from (i) softening growth momentum in some key economies (i.e. China); (ii) uncertain energy and commodity prices; and (iii) greater divergence in monetary policy among world influential central banks.
• Closer to home, the MPC remained cautiously optimistic on domestic demand that will continue to sustain the nation’s GDP growth (2015f: +4.5-5.5%) and 2016 (+4.0- 5.0%), albeit at a more moderate rate. Slower household spending would be a result of further adjustment to higher living costs and uncertain economic conditions. Investment would be sustained by infra projects and CAPEX by manufacturing and services sectors.
• The MPC expected headline inflation to stay stable towards year-end. For 2016, headline inflation is expected to be higher, to peak in 1Q16 and moderating thereafter.

Comments

• The slight dovish tone of the latest MPS was unchanged from the previous meeting. The MPC continued to express concerns about the global economy, with the sentence of “downside risks to growth remain high” appeari ng twice in the statement. The MPC mentioned that policy shifts could possibly heighten financial market volatilities. In our view, these include Fed rate liftoff, further QE by ECB and BOJ, and further easing by the Chinese authorities.
• The MPC continued to emphasize the resilience of domestic banking system and sufficient domestic liquidity to support financial intermediation and credit activities. In this regard, we opine that domestic liquidity has already stabilized, and no cut in SRR is needed at this juncture.
• While pending for actual 3Q GDP number to be released on 13 Nov, we maintain our 2015 full year GDP growth estimate at 5.0%, eyeing a small growth rebound to 5.0% in 4Q after bottoming out at an estimated 4.7% in 3Q. Private sector expenditure will continue to hold the growth baton, cushioning the weakness in exports and public spending following the completion of some projects.
• On inflation, we expect CPI growth to average at 2.2% this year before elevating somewhat next year, after taking into the account steady fuel prices and the series of administered price adjustments (i.e. toll rates, rail fares and cigarette prices). Nonetheless, underlying inflation would be kept in check, consistent with moderate domestic consumption.
• All-in-all, we expect BNM to prolong its pause on the OPR at 3.25%, at least until 1H16. Rate cut is off the table given the relatively resilient economic outlook and a potential spike in inflation in 1Q16. On the other hand, we also expect BNM to bite the bullet of a period of negative real interest rates that is likely to happen in 1H16.

Source: Hong Leong Investment Bank Research - 6 Nov 2015