News 

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

• The MPS cited global economy continued to strengthen as recovery has become more entrenched and synchronized across countries. In the advanced economies, economic slack has diminished following sustained economic performance. In Asia, growth has been driven by sustained domestic activity and strong external demand. Global outlook remains favourable despite ongoing geopolitical and policy development risks.

• For Malaysia, economic growth has become more entrenched with both domestic and external factors registering strong performance. The stronger spillover from external sector to the domestic economy has led to higher productive capacity investment, increased wages and hiring of workers. In 2018, BNM expected growth to remain strong, with domestic demand being the key driver of growth reinforced by external sector as additional impetus. Private consumption will remain the largest driver of growth reinforced by higher level of investment.

• On inflation, BNM explains that inflation has been driven mostly by global oil prices. In 2018, headline inflation is projected to moderate on expectations of a smaller effect from global cost factors but remain uncertain. Nevertheless, underlying inflation will be sustained by robust domestic demand.

Comments

• The tone of the latest MPS is more optimistic on strength and pervasiveness of global growth which has led to stronger spillover effect to the domestic economy.

• On growth prospects, we concur with BNM’s view that growth outlook remains resilient to be increasingly dri ven by domestic demand. The recent budget measures are expected to support growth momentum in private consumption while healthy capex commitments have been seen in both the manufacturing and services sectors.

• Inflation is expected to rise in the near-term due to recent trends of higher petrol prices. A sustained rise in oil price above US$60/pb may lead to higher headline inflation but this will be partly mitigated by ringgit appreciation bias.

• The MPC said that it may “consider reviewing the current degree of monetary accommodation”. We take this as a signal that BNM is getting ready to normalise the interest rates should domestic demand growth pan out as expected.

• Despite the hawkish stance in MPS, we opine that rate hike is not imminent (i.e. in 1H18) as threat of financial imbalances is still largely absence i.e. moderate loan growth (Sep: +5.2%), house price index (1Q: +5.6%) amid expectations of a milder inflation in 2018.

• We introduce 2018 interest rate forecast that BNM will hike the OPR by 25bps in 2H18, bring the OPR to 3.25% by end of 2018.

Source: Hong Leong Investment Bank Research - 10 Nov 2017