As anticipated, the MPC maintained the OPR at 3.00%. The tone of MPS was neutral with increasing emphasis on downside risks. On the global front, the MPC expects global growth to more subdued following increasing signs of trade tension spillovers to domestic economy in some countries. On the domestic front, the MPC maintained its growth forecast of 4.3-4.8%, and said Malaysia’s diversified exports are expected to provide a buffer against softening global demand. This suggests that BNM may prefer to hold off from easing and wait for stronger evidence of domestic slowdown before acting further. Nevertheless, against this environment of worsening trade tension with negative implication on global demand and commodity prices, we maintain our expectation for BNM to have an easing bias and reduce the OPR by 25bps in the next six months.

DATA HIGHLIGHTS

On the global front, the tone of MPS was subdued, as slower growth was seen across most major advanced and emerging economies. Weakening global trade activity is expected to be exacerbated by the recent escalation of trade tensions, with increasing evidence of spill overs to domestic economic activity in several countries. While the shift to monetary policy easing in several major economies has eased global financial conditions, the MPC assessed that uncertainty arising from prolonged trade disputes and geopolitical developments could lead to excessive financial market volatility.

On the domestic front, growth is expected to remain supported by domestic demand amid resilient private spending, stable labour market and wage growth. The MPC also opined that Malaysia’s diversified exports will provide a buffer against the impact of softening global demand, and maintained its growth forecast of 4.3-4.8% for 2019. Nevertheless, the Committee emphasised that the forecast remains subject to further downside risks emanating from worsening trade tensions, uncertainties in the global and domestic environment, and prolonged weakness in commodity-related sectors.

On inflation, the MPC expects inflation to average higher for the rest of 2019 and into 2020, but still remain low. This is mainly due to the lapse in the impact of consumption tax policy changes, relatively subdued outlook on global oil prices and policy measures in place to limit food inflation. The trajectory of headline inflation will be dependent on global oil and commodity prices. Nevertheless, underlying inflation is expected to remain stable, supported by continued expansion in economic activity.

There was no mention of financial market conditions, which suggests that the Committee does not see financial stability as a forefront risk. Nevertheless, financial conditions have continued to ease further, even after the initial OPR reduction in May 2019. KLIBOR 3-month rate currently stands at 3.39%, lower than the reading post MPC May meeting of 3.46% (Sep: -1bps; Aug: -6bps; May: -23bps) Similarly, weighted average lending rate continued to fall (Jul: -3bps; Jun: -2bps; May: -17bps).

HLIB’s VIEW

Despite mounting global risks, BNM maintained the interest rate at 3% as Malaysia’s economy continues to grow at a steady pace. BNM kept its growth projection for this year unchanged at 4.3%-4.8%, but said it was subject to further downside risks from worsening trade tensions and other global uncertainties. This suggests that BNM may prefer to hold off from easing and wait for stronger evidence of domestic slowdown before acting further. Nevertheless, against this environment of worsening trade tension with negative implication on global demand and commodity prices, we maintain our expectation for BNM to have an easing bias and reduce the OPR by 25bps within the next six months.

Source: Hong Leong Investment Bank Research - 13 Sept 2019