The MPC maintained the OPR at 3.25%, as expected. The tone of MPS is slightly more dovish with emphasis on downside risks. On the global front, the MPC continued to expect global expansion, albeit at a more moderate pace. On the domestic front, MPC anticipated Malaysia’s growth to remain on a steady path driven by private sector. 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 expected.

On the global front, the MPC stated that the expansion of the global economy continued, albeit with signs of moderating momentum. Previously BNM highlighted the ‘divergence’ across economies, as the US economy recorded faster GDP compared to other peer economies. The omission of ‘divergence’ indicates the global growth momentum is expected to be more modest overall in 2019 as major countries grow at a more moderate pace. Further escalation of trade tensions, continued volatility in international financial markets and monetary policy normalisation continue to be key sources of downside risks.

On the domestic front, the MPC foresees Malaysia to remain on a steady growth path (MOF: 4.5-5.5% YoY), driven by private sector activity. Public sector spending is likely to weigh on growth. Nevertheless, the Committee opines the recent announcements by the Government have also provided more clarity on domestic policies. The economy also continues to face downside risks stemming from any escalation in trade tensions and prolonged weakness in the mining and agriculture sectors.

On inflation, BNM announced that inflation will be low in 2018 before moving up in 2019. This is premised on higher global oil prices and the floating of domestic fuel prices. It also stated that the impact of tax-related policies on goods and services will be transitory and will lapse towards the end of 2019. Importantly, underlying inflation is expected to remain contained in the absence of strong demand pressures.

BNM stated that domestic financial markets continue to experience non-resident portfolio outflows due to ongoing global developments. Nevertheless, it reiterated Malaysia’s sound financial sector, strong fundamentals alongside steady economic growth, low unemployment and current account surplus. BNM will continue its monetary operations in line with ensuring sufficient liquidity to support the orderly functioning of money and foreign exchange markets and intermediation activity.

HLIB’s VIEW

The tone of the MPS is slightly more dovish as the outlook for the external sector is anticipated to moderate in a synchronised fashion. Domestically, the Committee continues to see steady growth trajectory, driven by the private sector. Nevertheless, risks remain skewed to the downside arising from external challenges and commodity weakness (agriculture and mining sectors).

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 in 2019 unless external sector deteriorate significantly with negative repercussions on the domestic economy.

Source: Hong Leong Investment Bank Research - 9 Nov 2018