DATA HIGHLIGHTS

BNM raised the OPR by another 25bps to 2.25% in the July 2022 MPC meeting, as expected. The global economy continues to recover amid economic reopening and strong demand conditions. However, MPC noted the strength of recovery has been partly offset by the impact of rising cost pressures, the Russia-Ukraine conflict and strict lockdowns in China. At the same time, rising inflationary pressures as a result of elevated commodity prices and strong demand conditions are expected to warrant a faster pace of monetary policy tightening among some central banks, which may also lead to increased financial market volatility. Taking these factors into account, the MPC now expects the pace of global growth to moderate.

On the domestic front, the MPC noted that economic activity has continued to strengthen following the strong showing for indicators such as exports and retail trade, which was consistent with the timing of full economic reopening. Employment prospects have also improved amid decline in unemployment rate, higher labour force participation and continued wage growth. While external demand is expected to moderate due to rising headwinds on the global front, the MPC expects economic growth to be supported by firm domestic demand. Following favourable growth prospects in 1H22 alongside the EPF special withdrawal scheme, reopening of international borders, we upgraded our 2022 GDP forecast to +5.9% YoY (previous: +5.5% YoY), though slower growth is expected in 2H22, particularly in 4Q22. Downside risks to growth still remain, from weaker-than-expected global growth, further escalation of geopolitical conflicts and worsening supply chain disruptions.

On inflation, while BNM has maintained its inflation projection of 2.2% - 3.2% in 2022, it noted that inflation could bump up in some months due mainly to base effect from electricity prices, which we are also in agreement could happen in Jul-Sep 2022 before moderating in 4Q22. Overall, the committee opines that upside inflationary pressures will remain partly contained by existing price controls, fuel subsidies and continued spare capacity in the economy. Our 2022 inflation forecast was previously revised upwards to +3.2% YoY (previous: +2.7% YoY) following higher food inflation pressures, in the upper range of BNM’s forecast.

HLIB’s VIEW

While the MPC expects growth to moderate on the global front, Malaysia’s transition to endemicity provides an impetus to growth, particularly in the 2Q22 GDP, thus supporting their decision to further adjust the degree of monetary accommodation. Notably, the committee also does not view adverse pandemic developments to be an overhanging risk as it did in the past, but continue to see the balance of risk skewed towards the downside. They reiterated that any adjustments to monetary policy would be done in a measured and gradual manner. Following this development, we maintain our expectation for BNM to raise OPR by another 25bps in the Sep MPC meeting, bringing OPR to 2.5% by the end of the year.

Source: Hong Leong Investment Bank Research - 7 Jul 2022