News

• As expected, BNM kept its OPR unchanged at 3.00%.

• The MPS cited improvements in economic activity in major advanced economies while growth in Asia was driven by domestic demand amid some recovery in external demand. The MPC forecasted global growth to improve at a slightly faster pace in 2017, partly due to fiscal policy in advanced economies. Nevertheless, there is still uncertainty arising from protectionism risks, financial market volatility and commodity price volatility.

• On the financial market, the MPC noted that the implementation of FX measures has provided some stability to the domestic FX market. However, BNM also acknowledged that geopolitical developments may result in bouts of volatility in regional financial and FX markets. In this regard, BNM will continue to provide liquidity to ensure orderly functioning of the domestic FX market. It also reiterated on Malaysia’s strong fundamentals (i.e. ample liquidity, strong capital and liquidity buffers).

• The domestic economy continued to expand in 4Q16. The MPC said private sector activity will remain the key driver of growth with sustained private consumption. Meanwhile, investment activity will be supported by on-going infra projects and capex in the manufacturing and services sector. Importantly, export is expected to improve.

Comments

• The tone of the latest MPS was broadly neutral. We note an increased optimism on the global economy with positive implications on Malaysia’s exports.

• On growth prospects, BNM expected the economy to expand further with sustained private consumption growth and ongoing investment spending reinforced by an uptick in exports. This is broadly in line with our projection as we expect GDP growth to be higher at 4.5% in 2017 (2016e: 4.2%), premised on a recovery in the primary sector, strong construction and stable services.

• On inflation, we expect inflation to average 2.7% in 2017, following higher fuel prices (Brent oil assumption: US$50/pb in 2017; average 2016: US$44/pb), sustained food inflation and weaker ringgit. However, there is a high possibility of CPI overshooting 3% in early 2017 due to low base effect of oil price in 2016.

• At the current level of OPR, the MPC said the degree of accommodation is consistent with the steady pace of economic activity and stable inflation. We take this as a signal that BNM prefers to leave the OPR unchanged so long as outlook of GDP growth and core inflation falls within the official projection range (i.e. 2017 GDP: 4-5%).

• We reiterate our forecast for BNM to maintain policy rate at 3.00% on expectations of stronger growth and higher inflation. As domestic liquidity situation has eased since Nov-Dec period, we opine that BNM may only deploy a cut in SRR in the event of any global financial turmoil triggered by adverse external development (i.e. European politics)

Source: Hong Leong Investment Bank Research - 20 Jan 2017