News

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

• The MPS cited a stronger global economy as industrial activity and global trade have exceeded earlier projections. In the advanced economies, the broad-based increase in investment and steady consumption has lifted growth prospects. This in turn has generated positive spillovers to Asia’s growth prospects. Meanwhile, risks to global growth outlook arise mainly from political and policy uncertainties.

• For Malaysia, the better-than-expected growth in 1Q17 was lifted by both domestic and external demand. Going forward, the more favourable global growth outlook is expected to lead to sustained export performance and improvement in the domestic economy. Private consumption will be driven by higher wages and employment while investment will be lifted by stronger capacity expansion in the manufacturing and services sectors.

• On inflation, BNM expects headline inflation to moderate in the second half of the year mainly reflecting the waning effect of global cost factors. The more robust domestic demand could feed to core inflation. Nevertheless, it is expected to remain contained.

• On the financial market, the MPC noted that the ringgit has continued to stabilize following the implementation of BNM’s financial market development measures. It reiterated that banking system liquidity remains sufficient while growth of financing has improved, consistent with the pace of economic activity.

Comments

• The tone of latest MPS was more optimistic on global growth and its spillover to the domestic economy.

• On growth prospects, BNM noted that growth was better than-expected as stronger exports facilitated the improvement in domestic demand. Given the robust external sector, growth in the subsequent quarters will be driven by sustained export performance and its spillover to domestic demand. We maintain our forecast for GDP growth to remain favourable but at a more moderate pace in 2H17 given ebbing of low base effect. We retain our full year 2017 GDP forecast at 4.9% yoy.

• On headline inflation, we expect inflation to moderate in 2H17 as the impact of base effect ebbs. The recent weakening bias in commodity prices particularly crude oil price amid still weak ringgit will exert lesser pressure on oil-related sectors.

• BNM said that recent improvement in financing growth is consistent with the pace of economic activity while banking system liquidity remains sufficient. We take these as signals that BNM prefers to leave the OPR unchanged as the improvement in growth comes from a low base while core inflation is expected to remain contained. In addition, financial stability concerns remain in check.

Source: Hong Leong Investment Bank Research - 5 Sept 2017