BNM raised the OPR by 25bps to 2.5% in the Sep MPC meeting, as expected. Going forward, BNM sees downside risks to the global and domestic economy. On inflation, it also expects inflation to peak in 3Q22 before moderating. Taking cue from the statement that the MPC is not on any pre-set course regarding future adjustments to its monetary settings, we think BNM will be cautious and analyse incoming data before deciding its next course of action. Hence, we maintain our expectation for BNM to pause in November and keep OPR unchanged at 2.5% until end-year.

DATA HIGHLIGHTS

BNM raised the OPR by another 25bps to 2.5% in the Sep 2022 MPC meeting, as expected. The global economy has continued to expand, albeit at a softer pace, dragged by mounting cost pressures, tighter global financial conditions and China’s strict Covid-19 control measures. Inflationary pressures have also remained stubbornly high despite the easing supply chain constraints, due to still elevated commodity prices and tight labour markets. To mitigate these pressures, central banks are anticipated to continue tightening their monetary policy, some at a quicker pace. The Fed’s aggressive tightening have also contributed to a strong USD environment, causing higher volatility in financial markets, affecting currencies including the ringgit. Going forward, the outlook is subject to downside risks, including persistent inflation, Europe’s potential energy crisis and a sharp tightening in financial markets.

On the domestic front, the MPC noted that Malaysia’s transition to endemicity and policy measures have contributed to the strong 2Q22 growth. Growth is expected to continue moving forward, mainly driven by private sector spending. Labour market conditions and income prospects also remain positive, following the continued downtrend in unemployment and underemployment. Tourism-related industries will also be boosted as a result of borders reopening. Our 2022 GDP forecast of 6.5% sits beyond BNM’s forecast of 5.3-6.3% YoY, reflective of strong 1H22 GDP figures and expectations for continued growth in 3Q22. Nevertheless, BNM expects external demand to soften following a slowdown in global growth. We also expect growth to moderate in 4Q22 as base effect dissipates, as well as softer global demand. MPC sees slower-than-expected global growth, further escalation of geopolitical tensions and worsening supply disruptions continue to pose downside risks to the domestic economy.

On inflation, BNM projects headline inflation to peak in 3Q22 before moderating, following abating base effects and the expected easing of global commodity prices, consistent with our view. Meanwhile, core inflation is expected to average closer to the higher end of their 2.0% to 3.0% forecast range in 2022, with some signs of demand driven pressures amid the high-cost environment. As of now, BNM does not see any strong signs of second round effect of inflationary pressure. Instead, BNM anticipates the extent of upside pressures to inflation to remain partially contained, due to the existing price control measures and subsidies.

HLIB’s VIEW

BNM decided to further tighten its monetary policy following the domestic economy’s positive growth momentum. However, the committee noted that the MPC is not on any pre-set course regarding future adjustments to its monetary settings and will continue to assess evolving conditions and its impact on inflation and the growth outlook. Hence, we maintain our expectation for BNM to pause in November and keep OPR unchanged at 2.5% until end-year.

Source: Hong Leong Investment Bank Research - 9 Sept 2022