The MPC reduced the OPR to 3.00%. The tone of MPS is neutral with emphasis on downside risks. On the global front, the MPC continued to expect moderation as downside risks from unresolved trade tensions and policy uncertainties remain. On the domestic front, the MPC reiterated Malaysia GDP forecast at 4.3%-4.8%, with downside risks arising from heightened uncertainties in the global and domestic environment. The MPC said there was some tightening of financial conditions, and the OPR adjustment was intended to preserve the degree of monetary accommodativeness. On this note, we opine that BNM will maintain the OPR at the current level unless external sector deteriorates significantly.

DATA HIGHLIGHTS

BNM reduced the OPR rate to 3.00%. While this missed our expectations, it was predicted by 14 out of 23 economists surveyed by Bloomberg.

On the global front, the MPC emphasised that considerable downside risks to global growth remain, stemming from unresolved trade tension and prolonged country specific weaknesses in the major economies. The Committee assessed that although tightening of global financial conditions have slightly eased, heightened policy uncertainties could lead to a sharp adjustment in financial markets, further weighing on the overall outlook.

On the domestic front, the MPC expects economic activity to be moderate in 1Q19 which points to slower growth in 1Q 2019 (data will be released on 16th May). While the Committee continues to see stable labour market conditions and capacity expansion to sustain growth, slower global demand will continue to weigh on the external sector. Consequently, while BNM maintained the GDP forecast at 4.3-4.8%, the Committee acknowledged that downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and prolonged weakness in commodity-related sectors remain.

On inflation, the MPC opined that inflation is expected to remain broadly stable in 2019 after recording moderate growth of 1% in 2018. The trajectory of headline inflation will continue to be dependent on global oil prices. Nevertheless, underlying inflation is expected to remain stable, supported by continued expansion in economic activity and absence of strong demand pressures.

The MPC stated that financial markets remained resilient despite periods of volatility due to global developments. While the domestic monetary and financial conditions remain supportive of economic growth, the MPC noted some signs of tighter financial conditions which have led to adjustments in the OPR to reverse the tightening conditions.

HLIB’s VIEW

The tone of the statement suggest that the rate cut is not the start of an easing cycle, but a one-off rate cut to reverse some signs of tighter financial conditions. The rate cut may have been intended to also purchase insurance against considerable downside risks (renewed threat of US-China trade relations, country specific weaknesses). We maintain our GDP forecast at +4.6% YoY, within BNM’s GDP forecast range of +4.3%-4.8% YoY with the expectation that GDP will improve in the 2H 2019. Hence, we expect BNM to retain the OPR at current level unless trade tensions escalate further, negatively affecting Malaysia GDP.

Source: Hong Leong Investment Bank Research - 8 May 2019