BNM raised the OPR by 25bps to 2.75% in the Nov meeting. BNM noted that despite the challenging global environment, domestic demand will remain the driver of growth. On inflation, it continues to expect headline inflation to peak in 3Q22 before moderating but remain elevated in 2023 amid demand and cost pressures, as well as any domestic policy measures. Following this development, we now expect BNM to raise the OPR by 50bps by 1H23 to reach 3.25%.

DATA HIGHLIGHTS

BNM raised the OPR by another 25bps to 2.75% in the Nov 2022 MPC meeting. The global economy continues to suffer from mounting cost pressures, tighter global financial conditions, as well as China’s strict Covid-19 measures. Despite easing supply disruptions, inflationary pressures remained elevated due to still-high commodity prices and tight labour market conditions. As consequence, many central banks are anticipated to continue tightening their monetary policies. Going forward, the growth outlook remains subject to downside risks, including an escalation of geopolitical tensions, worsening conditions in China and potential energy rationing in Europe.

On the domestic front, BNM noted that economic activity has further strengthened in 3Q22 according to latest indicators, driven mainly by robust domestic demand. Going forward, BNM opines domestic demand will remain the key driver of growth, with household spending underpinned by the better labour market conditions. Reopening of international borders are also expected to lift tourism-related sectors further, while investment activities will be driven by the realisation of multi-year projects. However, external demand is anticipated to moderate following softening global growth. This is in line with our view of a stronger GDP print for 3Q22 driven by the strong labour market, which will then be followed by a slowdown in 4Q22 as base effect dissipates and external conditions ease. In 2023, we anticipate GDP to grow at 4.5% YoY, supported by domestic demand. MPC sees downside risks remaining, stemming from slower-than-expected global growth, higher risk aversion in financial markets, further escalation of geopolitical conflicts, and worsening supply disruptions.

On inflation, BNM continues to expect headline inflation to peak in 3Q22 before moderating thereafter, however noting it will remain high, consistent with our view. Meanwhile, core inflation is projected to average closer to the higher end of their 2.0% to 3.0% forecast range in 2022. Moving into 2023, BNM expects headline and core inflation to remain elevated amid both demand and cost pressures, and any adjustments to domestic policies. While government was silent on fuel subsidy rationalisation plan in the Budget 2023 speech, we reckon this measure may be implemented post GE15 sometime in 2023 as government projects CPI to range 2.8- 3.3% in 2023. Our CPI forecast of 2.9% YoY assumes RON95 petrol price ceiling increase to RM2.15/litre (current: RM2.05/litre).

HLIB’s VIEW

BNM decided to further tighten its monetary policy in Nov, citing Malaysia’s continued positive growth prospects. The MPC reiterated that they are not on any pre-set course and that future decisions will continue to be dependent on evolving conditions and their implications on inflation and growth. However, they did note that this adjustment would also pre-emptively manage the risk of excessive demand on price pressures, which seems to suggest their concern on possibly higher inflation in 2023 following high cost pressures and possible changes to domestic policy measures. Following this, we expect BNM to continue raising OPR by 50bps by 1H23.

Source: Hong Leong Investment Bank Research - 4 Nov 2022