News

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

• The MPS cited continued improvements in global economy, as industrial activity and global trade have picked up. Importantly, growth is becoming more synchronized across the globe.

• In the near term, BNM expects the global economy to improve further as the revival in investment activity in advanced economies will provide additional support to global trade, benefitting emerging economies. Nevertheless, risks arising from protectionism, geopolitical developments and commodity price volatility could reignite financial market concerns.

• For Malaysia, BNM expects growth momentum to strengthen in 1Q 2017 and maintain for the rest of the year. Exports are expected to perform better and contribute positively to growth while domestic demand will be driven by continued wage, employment growth and implementation of infrastructure projects.

• On inflation, BNM expects headline inflation to be higher in 2017, reflecting transitory factors. 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 ringgit has continued to stabilise. It emphasised that banking system liquidity remains sufficient while growth of financing is consistent with the pace of economic activity.

Comments

• The tone of the latest MPS was more positive compared to the previous statement in March.

• On growth prospects, BNM expected the economy to strengthen in 1Q 2017 with momentum to be sustained thereafter. Despite our recent upward revision in 1Q17 GDP growth estimate to +4.9% yoy, there is upside risk to our 2017 growth forecast of +4.5% if strong exports persist into 2H17 to provide further impetus to growth.

• On inflation, we expect inflation to average 3.4% in 2017, following higher fuel prices (RON95 assumption: RM2.20/l in 2017; average 2016: RM1.76/l), sustained food inflation and weak ringgit. We expect inflation to moderate after reaching a peak of 5.1% yoy in March as the low base effect of oil price in 2016 ebbs.

• At the current level of OPR, the MPC said the stance of monetary policy is still 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 inflation falls within the official projection range (i.e. 2017 GDP: 4.3-4.8% 2017 inflation: 3-4%).

• We reiterate our forecast for BNM to maintain policy rate at 3.00%. Despite the higher GDP print in 1Q17, we expect growth to moderate thereafter as base effect wanes in the second half of 2017. We expect growth to be driven by better export performance, robust construction activity and improvement in agriculture sector for the year.

Source: Hong Leong Investment Bank Research - 15 May 2017