News

• BNM unexpectedly reduced the OPR by 25bps to 3.00%, marking the first decrease since the GFC.

• BNM acknowledged that global growth prospects have become more susceptible to increased downside risks following the recent EU referendum vote.

• On the financial market, the MPC acknowledged that international financial markets could be subjected to greater volatility going forward.

• BNM has also reduced the inflation projection to 2.0-3.0% in 2016 on account of low global commodity prices (previous: 2.5-3.5%). The MPC also expected a lower risk of destabilizing financial imbalances as earlier measures have resulted in more prudent lending standards and contained speculative activities in the property market.

• The MPC continued to expect the domestic economy to remain on track to expand in 2016 and 2017. Household spending would be supported by income, employment growth and government measures while investment would be sustained by on-going implementation of infra projects. The uncertain external envi ronment, however, could weigh on Malaysia’s growth prospects.

Comments

• The tone of latest MPS suggests to us that Governor Datuk Muhammad Ibrahim, in his second MPC meeting, is being pre-emptive to ensure that growth remains on its projected path given possibility of further external slowdown. We also opine that the rate cut might carry a secondary intention of realigning Malaysia to the already highly accommodative global monetary conditions, preventing build-up of excessive inflow speculation.

• On growth prospects, BNM expected domestic demand to remain on track to expand in 2016 and 2017. This is in line with our expectation of growth to stabilise in 2H 2016 on account of domestic demand support arising mainly from (i) continued recovery in consumption supported by measures to raise disposable income, and (ii ) sustained pick-up in construction sector.

• On domestic financial conditions, BNM noted that financial system has remained stable and the risk of destabilizing financial imbalances have receded. We opine that BNM has declared victory over the fight on financial imbalances via macro and micro prudential measures. Consequently, this has accorded room for BNM to ease the property measures without undermining financial stability.

• On inflation, we maintain our CPI growth forecast for 2016 at 2.5%. Inflation is no longer a concern for BNM in line with the expectation of MPC for a lower inflation for the rest of the year.

• While the statement sounded neutral on the next move, we opine that BNM is keeping their options open with an easing bias in the near-future. As we still expect soft patch in economic data releases for the next two months, the possibility is high for another 25bps cut in the next MPC meeting on 6-7 September.

Source: Hong Leong Investment Bank Research - 14 Jul 2016