Global and Domestic Economic Momentum Is Likely to Sustain

Bank Negara Malaysia (BNM) maintained its Overnight Policy Rate (OPR) at 3.25% for the second consecutive MPC meeting since January 2017 (where BNM raised its benchmark interest rate by 25bps from 3.0%). BNM also maintained the statutory reserve requirement (SRR) unchanged at 3.5% since January 2016. BNM noted that “the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid lower inflation.” In the latest assessment of the global economic development, BNM holds the view that the positive economic momentum in the global economy remains, with growth being more broad based and synchronised across regions. Growth in advanced economies are mainly supported by domestic demand (i.e. higher wages and diminishing labour market slack), while growth in Asian economies are benefitting from sustained economic activity and strong external demand. BNM also highlighted the downside risk from trade and geopolitical tensions, while financial market continues to face intermittent volatility due to trade tensions as well.

The latest MPC statement was released one day after the country’s GE14, where BNM maintains the view that “prospects for the Malaysian economy remain strong,” indicating that BNM will likely maintain its GDP growth projection for 2018 at 5.5-6.0% (as compared to 5.9% in 2017), as compared to our forecast of 5.3%. Apart from steady exports, BNM also noted that “positive growth momentum is expected to be sustained, driven by the strength in both domestic and external demand. Private consumption will be supported by favourable income and labour market conditions. Investment activity is projected to be sustained by implementation of ongoing infrastructure projects and capacity expansion by firms.” This view by BNM on investment activity will likely provide some comfort to market participants. Going forward, from the market's perspective on the country’s economic growth and financial market performance, the immediate focus of investors will be on how the new government addresses policies and strategies to improve the business and consumer sentiment and private investment growth trends, as well as PH’s strategies to fix the government’s fiscal deficit position, with the abolishment of the goods and services tax (GST), as highlighted in its manifesto for GE14.

On the inflation front, BNM noted that the headline inflation will remain moderate, due to smaller effect from global cost factors, while a stronger ringgit exchange rate compared to 2017 will mitigate import costs. While the future direction of headline inflation will continue to be highly influenced by the global oil price, we also believe that with the new PH government committing to stabilising the retail oil price through fuel price stabilization/subsidies, the impact from higher global oil price to the headline inflation may likely be manageable.

With the recent change in Government after GE14, putting the country in uncharted territory, market participants will be focusing on how the PH government initiates immediate actions to generate economic activities in taking steps toward long-term economic growth and sustainability (matters such as fiscal policy, international relation and investment regulation). However, we believe BNM will likely wait until 2H18 to gauge the state of the Malaysian economy, before deciding on whether to raise OPR further by 25bps to 3.5%.

Source: Affin Hwang Research - 14 May 2018