As forecasted, BNM maintained the OPR at 1.75% in the Mar 2022 MPC meeting. The MPC sounded cautious as the recent escalation in geopolitical tension poses uncertainty to global growth and trade prospects, commodity prices and financial market conditions. Domestically, growth prospects are expected to improve, further supported by the expected reopening of international borders. Nevertheless, risks to Malaysia’s growth remain tilted to the downside due to external and domestic factors amid continued slack in the economy. We maintain our expectation for BNM to raise OPR by 25bps in 4Q22.

DATA HIGHLIGHTS

BNM maintained the OPR at 1.75% in the Mar 2022 MPC meeting. Notwithstanding the recent Omicron wave, global economic recovery remains on track, with more countries shifting towards endemic management providing support to growth prospects. However, the MPC views the Russia-Ukraine conflict as a key risk to global growth and trade prospects, commodity prices and financial market conditions. At the same time, the MPC notes that other factors such as prolonged supply disruptions, pandemic developments and heightened financial market volatility as major economies adjust their monetary policy to address inflation, will continue to influence the trajectory of global growth.

On the domestic front, the MPC held the view of stronger growth prospects for the year, driven by better global demand conditions, higher private sector expenditure amid improvements in the labour market and the expected reopening of international borders. The government is currently in negotiations with 12 countries to implement Vaccinated Travel Lanes. While the economic impact from the recent spike in Covid- 19 cases were less severe than previous waves, the Committee still sees downside risk to growth from pandemic-related developments and possible emergence of new variants of concern. External factors including weaker-than-expected global growth, geopolitical tensions and worsening supply chain disruptions also poses risks to the growth outlook.

On the inflation front, the MPC expects moderate headline inflation this year while core inflation normalises, supported by pickup in economic activity amid a high input cost environment. The Committee foresees upside risk to inflation, however this may be partly limited by continued slack in the economy and labour market. We note that while the unemployment rate has improved to 4.2% (crisis peak: 5.3%), it remains higher than pre-crisis level of 3.3%. In addition, time-related underemployment rate and skills related underemployment rate also continue to trend higher than pre-crisis ranges.

HLIB’s VIEW

The MPC reiterated that the current monetary policy stance is appropriate and accommodative. Nevertheless, we note that the phrase “amid the prevailing uncertainties” was added to the final sentence of the MPS, which is likely attributed to the recent escalation in geopolitical tension. We assess that BNM sounded cautious following the latest developments and will take a wait -and-see approach with regards to the timing of monetary policy normalisation due to the increased uncertainties and varying downside risks including continued virus prevalence and prolonged supply related disruptions. Hence, we maintain our expectation that BNM will raise OPR by 25bps in 4Q22.

Source: Hong Leong Investment Bank Research - 4 Mar 2022