News

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

• The MPS cited continued improvements in economic activity in major economies leading to subsequent recovery in global trade. Consequently, Asian economies are benefiting from stronger external demand. The MPC forecasted global growth to improve at a slightly faster pace in 2017. Nevertheless, there is still uncertainty arising from protectionism, geopolitical developments, financial market volatility and commodity price volatility.

• The MPC expects the Malaysian economy to chart a better growth in 2017 from 4.2% in 2016, benefiting from higher contribution from the external sector.

• On inflation, the MPC expects headline inflation to be higher in 2017, reflecting higher global oil prices. However, this is not expected to have a significant impact on broader price trends leaving core inflation to rise modestly.

• On the financial market, the MPC noted that the ringgit has continued to stabilize, similar to other regional currencies. It also stated that the financial market development measures had a positive impact on domestic financial markets without elaborating on details.

Comments

• The tone of the latest MPS was broadly neutral with a slight hint of optimism on external developments.

• On growth prospects, BNM expected the economy to expand further with sustained domestic activity and higher exports. This is broadly in line with our projection as we expect GDP growth to be higher at 4.5% in 2017 (2016: 4.2%), premised on a recovery in commodity prices and volume that would lift exports and robust construction activity.

• On inflation, we expect inflation to average 3.4% in 2017, following higher fuel prices (Brent oil assumption: US$55/pb in 2017; average 2016: US$44/pb), sustained food inflation and weaker ringgit. However, there is a high possibility of CPI overshooting 4% in early 2017 before moderating in the second half due to low base effect of oil prices in 2016.

• At the current level of OPR, the MPC said the stance of monetary policy is accommodative and supportive of economic activity. 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. Despite high possibility of headline inflation overshooting the official range of 2-3%, we do not anticipate BNM to react to it as it continues to reflect cost push factors. As domestic liquidity concern has eased, we opine that BNM may now shelve the SRR cut option and only deploy one in the event of adverse external development (i.e. triggered by European politics).

Source: Hong Leong Investment Bank Research - 3 Mar 2017