News 

• BNM raised the OPR rate by 25bps to 3.25%, as anticipated.

• The MPC expects global economy to experience faster expansion in 2018. The MPS cited that the global economy has strengthened further, with growth becoming more entrenched and synchronised across regions. In the advanced economies, diminishing labour market slack and additional policy support will provide further impetus to growth. In Asia, growth has been driven by sustained domestic activity and strong external demand. Risks to global growth outlook are more balanced.

• For Malaysia, latest economic indicators reaffirm the strength in exports and domestic activity. Hence, going into 2018, the Committee expects momentum to remain sustained by the stronger global growth and positive spillover to the domestic economy.

• On inflation, BNM expects inflation to average lower in 2018, on expectations of a smaller effect from global cost factors and ringgit appreciation. Underlying inflation, as measured by core inflation, remains moderate.

• On the financial market front, markets have been resilient while ringgit has strengthened to better reflect the economic fundamentals. The growth of financing to the private sector is supportive of economic activity.

Comments

• We feel that the tone of the latest MPS is neutral with a slight hawkish tilt.

• On growth prospects, while BNM kept mum on the trajectory of Malaysian economic growth in 2018, they sounded more optimistic on global growth and domestic economic activity prospects. Overall in 2018, BNM expects growth to remain strong, driven by external and domestic factors. We anticipate growth to remain commendable at 5.3% (2017e: 5.8% yoy), driven by higher public expenditure and steady domestic demand.

• Inflation is expected to average lower in 2018 on expectations of smaller effect from global cost factors. The Committee also acknowledged that stronger ringgit will mitigate import costs. Nevertheless, the trajectory of headline inflation will be dependent on future global prices which remain highly uncertain. Our forecast for headline inflation is 2.7%, which is within the government’s range of 2.5% - 3.5%. Importantly, BNM also noted that underlying inflation as measured by core inflation, remains moderate.

• The MPC said they will continue to assess the balance of risks surrounding the outlook for domestic growth and inflation. On this note, we opine that any future policy direction will be data-dependent. Our base case is for BNM to remain on hold for the rest of 2018, premised on the assumption that growth and inflation will become more moderate this year. Nevertheless, should growth and inflation surprise on the upside, we do not rule out the possibility of BNM increasing the interest rate by 25bps in 2H 2018.

Source: Hong Leong Investment Bank Research - 26 Jan 2018