As anticipated, the MPC maintained the OPR at 3.00%. On the global front, the MPC was more cautious as it sees global slowdown becoming more synchronised and downside risks arising from geopolitical tensions, policy uncertainty and prolonged trade tensions. On the domestic front, the MPC maintained its growth projection of 4.3-4.8% in 2019, with sustained pace going into 2020. While the overall tone for MPS remained neutral, we retain our expectation for BNM to have an easing bias and reduce the OPR by 25bps by end-1Q 2020 with the assumption that global trade uncertainty will continue.

DATA HIGHLIGHTS

On the global front, the tone of MPS was increasingly cautious. The Committee noted the slowdown in growth became more synchronized across advanced and emerging economies. There is also evidence of subdued global trade negatively affecting domestic demand, particularly investment activity. The MPC maintained that geopolitical tensions, policy uncertainty and prolonged trade tensions could exacerbate financial market volatility and further weigh on global growth outlook. The MPC opined that monetary policy easing in most major economies should provide some support to growth, thus not fully offsetting the negative impact.

On the domestic front, the MPC expected growth to expand at a moderate pace in 3Q19 following strong growth in 2Q19. Going forward, the Committee forecasted growth to be driven by private consumption amid positive labour market conditions, while private investment is anticipated to remain modest. Following the release of the latest exports number (Sep: -6.8% YoY; Aug: -0.8% YoY), the MPC acknowledged that trade will continue to be affected by weaker global demand, but mitigated by the diversified structure of Malaysia’s exports. Growth is still expected to be within projections of 4.3-4.8% in 2019 and sustained going into 2020. Nevertheless, it was subjected to downside risks arising from global and financial uncertainties, as well as weakness in commodity-related sectors.

On inflation, the MPC expected inflation to average lower in 2019 before rising in 2020, albeit at a modest pace. This is mainly due to the delay in removal of fuel price ceiling to 2020, lapsed impact from consumption tax policy changes, relatively subdued outlook on global oil prices and measures to contain food inflation. The trajectory of inflation will still be dependent on movements in global oil and commodity prices.

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. Weighted average lending rate continued to fall in September (-1bps; Aug: -1bps; Jul: -3bps).

HLIB’s VIEW

BNM kept its 2019 growth projection unchanged at 4.3-4.8% and expected sustained growth in 2020. Nevertheless, the Committee noted that growth was subjected to further downside risks from global geopolitical and financial uncertainties. This suggests that BNM is still on a “wait-and-see” mode, preferring to wait for the outcome on international trade discussions and stronger evidence of domestic slowdown before acting further. With the assumption that US-China trade uncertainty will continue in 2020, this may negatively influence investment sentiment and commodity prices, affecting Malaysia’s growth prospect. Hence, we maintain our expectation for BNM to have an easing bias and reduce the OPR by 25bps by end-1Q 2020.

Source: Hong Leong Investment Bank Research - 6 Nov 2019