News

• As expected, BNM kept its OPR unchanged at 3.00% after unexpectedly reducing the rate in the previous MPC meeting (13 July 2016).

• On global developments, the MPS cited modest growth in advanced economies while economic activity in Asia continued to be supported by domestic demand.

• On the financial market, the MPC acknowledged that while volatility in international financial markets has receded, it remains susceptible to policy shifts and market developments as downside risks remain high.

• The MPC expected the Malaysian economy to be supported by domestic demand. Private consumption would be anchored by wage, employment growth and government measures while investment would be sustained by on-going infra projects and capex in the manufacturing and services sectors. However, export growth is expected to remain weak.

• The MPC expected inflation to be at the lower-end of the downward revised target of 2-3% and to remain relatively stable in 2017 given low energy and commodity prices.

Comments

• The tone of latest MPS was broadly neutral. We view this as a favourable development as growth outlook is seen to be on track anchored by domestic demand, especially private consumption and private investment.

• On growth prospects, BNM expected growth to expand within growth expectations of 4.0-4.5% in 2016. Growth will be supported by private consumption and private investment. This is in line with our expectation of growth to improve in 2H 2016 arising from (i ) continued recovery in consumption supported by measures to raise disposable income (ii) sustained pick-up in construction sector following larger-than-expected value of local contracts awarded (HLIB estimate: YTD at RM46bn; 2015: RM22bn), and (iii) gradual improvement in agriculture production given fading of El-Nino effect, leading to smaller decline in production on annual basis.

• On domestic financial conditions, BNM noted that financial system have remained stable since the previous MPC meeting. The MPS also stated that growth of financing is consistent with the pace of economic activity while banking liquidity remains ample. Hence, we opine that there is no immediate need for BNM to lower the SRR rate to increase liquidity in the banking system.

• On inflation, we maintain our 2016 CPI growth forecast at 2.0%, in line with BNM’s lat est inflation forecast at the lower-end of the 2-3% range for 2016.

• We also retain our forecast for BNM to maintain policy rate at 3.00% in Nov MPC meeting due to expectations of stronger growth in 2H 2016. We note that the subdued inflation rate accords BNM the flexibility to ease monetary policy should signs of growth disappointment emerge unexpectedly.

Source: Hong Leong Investment Bank Research - 8 Sep 2016