The MPC maintained the OPR at 3.25%, as anticipated. The tone of MPS is neutral with more emphasis on downside risks. 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 driven by private sector spending and external demand. 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.

DATA HIGHLIGHTS  

BNM Maintained the OPR Rate at 3.25%, as Anticipated.  

The MPC stated that the global economy continued to expand albeit with increasing divergence across economies amid signs of slower momentum. Downside risks have increased as trade tensions continue to be a key source of risk. Meanwhile, greater volatility in the international financial markets and monetary policy normalisation could lead to further capital outflows and financial market adjustments.  

For Malaysia, the MPC forecasted Malaysia to remain on a steady growth, underpinned by private consumption, export-oriented investment activity and external demand. However, in the immediate term, the economy faces downside risks stemming from heightened trade tensions, prolonged weakness in the mining and agriculture sectors and some domestic policy uncertainty.  

On inflation, BNM anticipated inflation to edge upwards, taking into consideration the impact of tax-related policy decision on goods and services. Nevertheless, it also stated that the impact is transitory and will lapse towards the end of 2019. More importantly, underlying inflation is expected to remain relatively stable.  

BNM acknowledged domestic financial markets continue to experience non-resident portfolio outflows due to ongoing global developments. Nevertheless, BNM reiterated Malaysia’s strong fundamentals including resilient financial markets, sound financial institutions, steady economic growth, low unemployment and current account surplus. BNM’s monetary operations will continue to ensure sufficient liquidity to support orderly functioning of money and foreign exchange markets and intermediation activity.  

HLIB’s VIEW  

The tone of the latest MPS is neutral with greater emphasis on downside risks from global and domestic front. The Committee expected continued economic activity in the global and Malaysia’s economy. However, it stated downside risks remain high as trade tension remains a key risk while prolonged weakness in the commodity sector could weigh on domestic economic activity. We anticipate GDP to grow at a more moderate pace (2018f: 4.8% YoY; 2017: 5.9% YoY) due to supply disruptions in commodity sector and adjustments in public sector spending.  

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 private sector spending surprises on the downside.

Source: Hong Leong Investment Bank Research - 12 Sept 2018