Inflation Is Likely to be Lower, But Domestic Growth to Remain Steady

Bank Negara Malaysia (BNM) maintained its Overnight Policy Rate (OPR) at 3.25% for the third consecutive MPC meeting since January 2018, where it raised its benchmark policy rate by 25bps from 3.0%. BNM also maintained its statutory reserve requirement (SRR) at 3.5%, unchanged since January 2016.

We believe the latest MPC statement reflects some cautiousness on economic growth and BNM has turned less hawkish as compared to the previous statements, especially on concerns relating to global trade wars. In the latest assessment of the global economic development, BNM noted that even though the global economy continues to expand, there are divergences across economies. Even with US economy stronger, the economic outlook for Asia has tilted towards the downside due to the global trade tension, which could impact trade, investment and consumption activity. BNM also highlighted the risk of further capital outflow and financial market adjustments in the emerging market due to risk of trade war and ongoing monetary policy normalisation in the advanced economies.

On the domestic front, BNM noted that the country’s economy is expected to benefit from higher household spending during tax holiday period which began in June and expected to last at least until August. BNM also believe that Malaysia economic growth will be further supported once there is a greater certainty in domestic policy in the coming months. The Malaysian Budget 2019 is expected to be announced on 2nd November 2018. BNM stated that “at the current level of the OPR, the degree of monetary accommodativeness is consistent with the intended policy stance. Additionally, BNM noted that the monetary operation will continue to ensure sufficient liquidity to support the orderly functioning of money and foreign exchange markets and intermediation activity.

On the inflation front, BNM is expecting the country’s headline inflation for 2018 to be lower than its earlier forecast, due to recent policy actions by the new Government affecting the domestic cost factors. We believe these may be attributed to some factors, such as i) zero-rating of GST, ii) a period of tax holiday due to gap between GST zero-rating and introduction of SST and iii) the fixing of retail domestic petrol prices. Going into 2019, the country’s inflation is also anticipated to remain low, especially in the first half of 2019.

Despite lower inflationary pressure going forward, we also believe that low inflation situation may only be transitory and due partly to cost factors, as such, BNM will llkely maintain its policy rate at 3.25% throughout 2018. However, with the domestic economy remaining on a steady growth path, we do not expect BNM to cut its benchmark interest rates anytime soon. At this juncture, we believe the financial market is likely to remain volatile, and Ringgit could remain under pressure in the short term due to the strong US$.

BNM noted that it will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.

Source: Affin Hwang Research - 12 Jul 2018