Global and Domestic Economic Momentum Is Likely to Sustain

Bank Negara Malaysia (BNM) maintained its overnight policy rate (OPR) unchanged at 3.0% for the seventh straight MPC meeting since July 2016. This was largely in line with market expectations. After assessing the overall economic conditions in the advanced and regional economies, BNM noted that “global economy continues to strengthen with growth becoming more entrenched and synchronised across countries.” Robust domestic consumption and investment activity were reflected in the advanced economies, while Asian region benefited from sustained domestic activity and strong external demand.

Most of the developed economies showed a better-than-expected economic growth performance in 2Q17, particularly in the Eurozone and Japan. However, on the downside risks to global growth, BNM cautioned that “outlook nevertheless may be affected by political and policy developments in major economies and geopolitical risks.”

On domestic economy, BNM is expecting a sustained economic momentum led by the global trade activity, which is expected to spill positively over to the domestic activity. Malaysia’s economic growth will be well supported by healthy domestic demand, where growth in private consumption is expected to continue to benefit from higher income and better labour market condition. On the other hand, growth in total investment is expected to be supported by various infrastructure projects implemented by the Government. Additionally, expectation of a strong external and domestic demand should support a sustained capital investment by businesses in the manufacturing and services sector.

On the inflation front, the country’s headline inflation continues to moderate, following the decline in domestic fuel prices. BNM is expecting that headline inflation will continue to moderate further due to the “smaller effect from global cost factors.” At the same time, we also believe the higher base effect of consumer price index particularly on the retail pump price will eventually lead to a lower headline inflation rate in the coming months. At the same time, BNM is expecting that core inflation, which excludes volatile and controlled price items, will remain manageable despite steady domestic demand. We are maintaining our headline inflation forecast at 3.5% for the whole of 2017.

Going forward, on the monetary policy front, we believe any normalisation of overnight policy rate (OPR) will unlikely take place until 2H2018. In the remaining MPC meeting scheduled on 9th November 2017, we expect BNM to leave OPR unchanged at 3%. However, if domestic economic conditions improve further next year, in tandem with a sustained strong global economic growth, we believe this may lead to a possible normalization of monetary policy, where the policy rate could rise by 25bps from the current 3% to 3.25%, but only in late 2018.

Since 16 August 2017, Ringgit has appreciated against the US$ by close to 2%, from RM4.30/US$ to RM4.21/US$ currently. We believe that BNM’s measure on exports proceeds (requiring the 75% conversion into Ringgit), as well as trade surpluses, will continue to provide support Ringgit and Malaysia’s reserves position. We expect the Ringgit to appreciate gradually against the US$, strengthening to RM4.10/US$ by end-2017.

Source: Affin Hwang Research - 8 Sept 2017