The MPC maintained the OPR at 3.00%. The tone of MPS is neutral with some emphasis on downside risks. On the global front, the MPC continued to expect moderation arising from prolonged trade tensions and policy uncertainties. On the domestic front, the MPC reiterated its growth forecast of 4.3-4.8% with downside risks arising from global and domestic factors. The MPC said the current monetary policy stance remains accommodative and supportive of economic activity. On this note, we opine that BNM will maintain the OPR at the current level unless external sector deteriorates significantly, negatively affecting GDP growth forecast.

DATA HIGHLIGHTS

BNM maintained the OPR rate at 3.00%, as expected.

On the global front, the MPC said that labour conditions in advanced economies remain firm while domestic demand continues to support growth in Asia. However, the MPC expects a moderation in the near-term due to prolonged trade tensions. Although the shift towards monetary easing have somewhat eased global financial conditions, the MPC continued to assess that heightened policy uncertainties could lead to excessive financial market volatility. On Malaysia’s economy, the Committee expects external sector to weigh on growth. However, growth is expected to remain supported by domestic demand amid stable labour market conditions and continued capacity expansion. The Committee reiterated BNM’s GDP forecast of 4.3-4.8%, but noted that the forecast remains subjected to downside risks from worsening trade tensions and prolonged weakness in commodity related sectors. For now, we are maintaining our GDP projection at +4.5% YoY as the slowdown in manufacturing and services sectors are expected to be offset by improvement in mining sector due to low base effect.

On inflation, the MPC expects inflation to rise in the near term. Similarly, we expect inflation to increase further and reach a stable rate of 1% in 2019 (2018: +1.0% YoY) due to policy changes. The trajectory of headline inflation will remain dependent on global oil prices and the timing of the removal of price ceiling on domestic fuel prices. Nevertheless, underlying inflation is expected to remain supported by continued expansion in economic activity.

There was no mention of financial market conditions in the MPS, which suggests that the Committee does not see financial stability as a forefront risk at the moment. Following the 25 bps OPR reduction in May MPC meeting, financial market conditions have eased somewhat. Weighted base rate was lowered by -25 bps while weighted average lending rate eased by -17bps in May 2019. On capital flows, foreign holdings of government bonds also recorded an inflow in June following two months of outflows (+RM6.7bn; May: -RM4.3bn; Apr: -RM8.3bn). Similarly, non-resident holdings of equities stabilised in May (+0.1bn; May: -RM2.0bn).

HLIB’s VIEW

The tone of the MPS remains neutral with some emphasis on downside risks. For now, we are maintaining our expectation of no change in OPR for 2019. Nevertheless, there is a possibility of another OPR cut should downside risks materialise. A deterioration of global growth emanating from an escalation of trade tension, would also lead to lower global oil prices with negative impact on inflation. Against this environment, high global risk aversion could stimulate capital outflows, tightening domestic financial conditions.

Source: Hong Leong Investment Bank Research - 10 Jul 2019