The MPC maintained the OPR at 3.25%, as expected. The tone of MPS is moderately dovish with emphasis on downside risks. On the global front, the MPC continued to expect global expansion, albeit at a more moderate pace as trade tensions are beginning to have material impact on real economic activity. 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 global economy continues to expand. Employment remains firm in the advanced economies, while in Asia, domestic demand is sustained. However, global growth momentum is moderating. After highlighting trade tension as a key source of downside risk in the previous meeting, the Committee assessed that the on-going trade tensions have started to have a material impact on global trade and investments. The MPC was also more cautious on the global economy as it feels that tightening financial conditions and heightened volatility in financial markets, coupled with country-specific factors could further weigh on growth prospects.

On the domestic front, the MPC opined economic activity to remain on a steady path, driven by private domestic demand activity. Private consumption will continue to be underpinned by stable employment and wage growth, while private investment will be supported by on-going projects in both export and domestic-oriented industries. This is expected to offset lower public spending arising from fiscal consolidation efforts. Previously, the Committee forecasted exports to provide an additional lift to growth, albeit at a lesser extent. However, the MPC now feels that external sector is likely to soften. This is consistent with the latest performance of regional economies’ exports and leading indicators (PMI) which also show a moderating trend.

On inflation, BNM opined that it is expected to average moderately higher in 2019 after recording moderate growth of 1% in 2018. The trajectory of headline inflation will be dependent on global oil prices. Nevertheless, underlying inflation is expected to remain contained in the absence of strong demand pressures.

BNM stated that financial markets remain resilient despite global developments. The Committee 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 remains moderately dovish as the outlook for the global economy continues to be clouded with downside risk. 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 shocks. 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 deteriorates significantly.

Source: Hong Leong Investment Bank Research - 25 Jan 2019