Unexpectedly, BNM kept the OPR unchanged at 2.75% in the Jan 2023 MPC meeting. BNM expects domestic growth to moderate in 2023, amid a slower global economy, but will remain supported by domestic demand. On inflation, BNM sees headline and core inflation moderating over the course of 2023, but still expects them to remain at elevated levels amid lingering demand and cost pressures. Following these developments, we think BNM is pausing to analyse the full effect of the previous rate hikes and await certain key outcome s before resuming its normalisation cycle, which could happen as early as May 2023.

DATA HIGHLIGHTS

BNM kept the OPR unchanged at 2.75% in the Jan 2023 MPC meeting – a move which took us by surprise as we had expected a +25bps hike. According to the statement, the global economy continues to suffer from elevated cost pressures, higher interest rates, and China’s Covid-19-related disruptions. In view of the still-high core inflation figures, central banks are anticipated to continue their course of tighter monetary policy action, albeit at a slower pace. This will continue to pose headwinds to the global outlook. However, BNM did note that growth in China is expected to improve once the current Covid-19 wave subsides. Nevertheless, the outlook remains subject to downside risks, including an escalation of geopolitical tensions, weaker than-expected growth in major economies, and a sharp tightening in financial market conditions.

On the domestic front, the MPC stated that latest data have indicated continued expansion in 4Q22, on account of resilient domestic demand. As a result, BNM expects growth for 2022 to exceed the earlier projected range of 6.5-7.0%. Growth is then expected to moderate in 2023, amid a slower global economy, but will remain supported by domestic demand. This is in line with our forecast for GDP to moderate to +4.0% YoY in 2023 (2022e: +8.2% YoY), supported mainly by domestic demand.

Meanwhile, BMN noted that tourist arrivals have continued to rise, lifting the tourism related sectors. The realisation of multi-year infrastructure projects will also support investment. Nevertheless, downside risks to growth remain, stemming from weaker than-expected global growth, higher risk aversion in financial markets, escalation of geopolitical conflicts, and renewed supply chain disruptions.

On inflation, BNM sees headline and core inflation moderating over the course of 2023, but still expects them to remain at elevated levels amid lingering demand and cost pressures, consistent with our view. We expect headline inflation to average slightly lower at +3.1% YoY in 2023 (2022e: +3.4% YoY), however this is still above pre-pandemic levels. BNM reiterated that risks to the inflation outlook are still tilted to the upside, and remain highly subject to any changes to domestic policies, as well as global commodity price developments.

HLIB’s VIEW

According to the MPC, the decision to keep OPR unchanged this round will allow them to assess the impact of the past rate hikes on the economy. They also mentioned that future normalisation would depend on the evolving conditions and their implications to inflation and growth. In view of the still-high inflationary pressures which could be exacerbated by the impact of China’s reopening on commodity prices, as well as any possible new subsidy rationalisation plans that may be implemented sometime this year, we think it is possible for BNM to hike OPR by another +25bps as early as May 2023 should upside risk to inflation materialise. This brings our revised end-2023 OPR target to 3.00% (from 3.25% previously).

Source: Hong Leong Investment Bank Research - 20 Jan 2023