As forecasted, BNM maintained the OPR at 1.75% in the Jan 2022 MPC meeting. The MPC held a neutral tone as they continued to see recovery in the global and domestic economy, but cautioned of downside risks from prolonged global supply chain disruptions and heightened financial market volatility as major economies adjust monetary policy to address elevated inflation. On the domestic front, they see growth momentum improving in 2022 and inflation to remain moderate with upside risk. For now, we maintain our expectation for BNM to raise OPR by 25bps in 4Q22.

DATA HIGHLIGHTS

As expected, BNM maintained the OPR at 1.75% in the Jan 2021 MPC meeting. The global economy remains on a recovery path. However, the Covid-19 resurgence in several countries have led to the reintroduction of measures to curb the spread and subsequently some dampening of recovery in domestic activity, especially services. Despite the resurgence risk, the MPC noted that countries are better equipped to manage the pandemic through the availability of anti-viral treatments and continued vaccination progress, thus providing support for global growth. Nevertheless, the MPC cautioned of downside risks from prolonged global supply chain disruptions and heightened financial market volatility as major economies adjust monetary policy to address elevated inflation.

On the domestic front, the MPC expects the growth momentum to improve further this year, driven by the expansion in global demand which should support trade and manufacturing activity. Private sector expenditure is also expected be propped up by higher mobility with all states in Phase 4, improvement in labour market conditions and continued policy support. However, the Committee still opines that risks are tilted to the downside, stemming from a potential worsening of supply chain disruptions, weaker-than-expected global growth and the emergence of vaccine-resistant variants of concern.

The MPC projects headline inflation to remain moderate in 2022 as the base effect from fuel inflation fades, but sees some upside risk to core inflation from normalisation of economic activity amid a high input cost environment. They also noted that prolonged supply-related disruptions pose a risk to the inflation outlook. Nevertheless, the MPC still expects core inflation to be modest owing to the continued spare capacity in the domestic economy and slack in the labour market.

HLIB’s VIEW

The MPC reiterated that the current monetary policy stance is appropriate and accommodative. Nevertheless, in the final paragraph of the MPS, we acknowledge that phrases such as “given uncertainties surrounding the pandemic” and “the Bank remains committed to utilise its policy levers as appropriate to foster enabling conditions for a sustainable economic recovery” were removed. We assess this is because the economy is already in the recovery phase. Going forward, with continued progress in vaccine coverage (as of 19th Jan, 30.6% of total population has received booster shots; 42.7% of adult population), we expect Malaysia to remain on a recovery path, further strengthened by improvement in labour market. Nevertheless, we sense that the MPC remain cautious on the timing of the withdrawal following prevalent downside risks from continued virus prevalence and prolonged supply-related disruptions. Hence, for now, we maintain our expectation that BNM will start its normalisation process in 4Q22.

Source: Hong Leong Investment Bank Research - 21 Jan 2022