The MPC maintained the OPR at 3.25% as anticipated. The tone of MPS is dovish. On the global front, the MPC continued to expect growth to be sustained, albeit with higher downside risks. On the domestic front, MPC anticipated Malaysia’s growth to remain on a steady path and inflation to be lower than initially expected due to transitory factors. Despite the global financial market volatility, BNM said domestic financial markets remained resilient and economic fundamentals were positive. The MPC said the degree of monetary accommodativeness is consistent with intended policy stance. On this note, we opine that BNM is comfortable in maintaining the OPR at its current level for now.

DATA HIGHLIGHTS

BNM maintained the OPR rate at 3.25%, as anticipated.

The MPC stated that the global economy continued to expand albeit with some divergence across economies. Downside risks have increased following the intensification of global trade tensions and shifting investor expectations of monetary policy normalisation in advanced economies.

For Malaysia, the MPC forecasted Malaysia to remain on a steady growth path sustained by both domestic and external demand. Private consumption is expected to be underpinned by wage, employment growth and consumption tax holiday. Investment is forecasted to be supported by capacity expansion in export-oriented and ongoing infrastructure projects. On the external front, Malaysia is expected to benefit from sustained global growth momentum.

On inflation, BNM anticipated inflation to be lower than earlier forecasted due to recent policy announcements. Nevertheless, it also stated that the impact is transitory. More importantly, core inflation, is also projected to remain moderate amid stable demand conditions.

BNM reiterated Malaysia’s strong fundamentals following the positive economic outlook, sound financial sector and improving current account surplus. Hence, BNM opined that the ringgit exchange rate would be more reflective of the underlying fundamentals when global and domestic uncertainties abate. Nevertheless, BNM’s monetary operations continue to ensure sufficient liquidity to support orderly functioning of money and foreign exchange markets and intermediation activity.

HLIB’s VIEW

We feel that the tone of the latest MPS is dovish. While the Committee continued to expect growth in the global economy, it stated that downside risks have risen. Nevertheless, the Committee continued to anticipate Malaysia’s growth to remain on a steady growth path, supported by domestic and external demand. On inflation, BNM forecasted price pressures to be more modest due to transitory factors. Similarly, we anticipate growth to grow at a more moderate pace (2018f: 5.2% YoY (2017: 5.9% YoY) and inflation to be more modest (2018f: 1.8% YoY; 2017: 3.7% YoY).

The MPC said that the degree of monetary accommodativeness is consistent with intended policy stance. On this note, we opine that BNM is comfortable in maintaining the OPR at its current level for now. Our base case is for BNM to remain on hold for the rest of 2018 unless growth surprises on the downside.

Source: Hong Leong Investment Bank Research - 12 Jul 2018