No Change in Statutory Reserve Requirement Ratio

Bank Negara Malaysia (BNM) decided to maintain its Overnight Policy Rate (OPR) at 3.25% for the sixth straight meeting since January 2018. Similarly, the statutory reserve requirement (SRR) remained unchanged at 3.5%. The decision by BNM to keep its OPR steady, signalled that the country’s stance of the monetary policy remains accommodative and supportive and the banking system’s liquidity remains ample.

In the BNM’s latest assessment of the global economy, the MPC statement reflected some concerns over potential escalation of trade tensions and commodity-related shocks, where risks to global growth are tilted to the downside. It noted that trade tensions between the US and China are starting to have an impact on global trade and investment. This was also in line with the IMF’s latest global GDP outlook, in which it warned that global trade, investment and output remain at risk due to policy uncertainty and continued trade tensions. As a result, IMF lowered its global growth forecast for 2019 and 2020 to 3.5% and 3.6%, respectively, citing the negative impact of tariff hikes. Apart from that, BNM also noted that global growth prospects will also be dampened by tightening financial conditions, the rise in financial market volatility as well as country-specific factors such as political and policy uncertainty and rising debt levels.

As for the domestic economy, BNM believes that domestic demand will continue to be the key driver of growth in 2019, led by private consumption and private investment. We believe private consumption will be supported by some of the 2019 Budget measures (such as cash assistance under BSH and possibly the rise in the national minimum wage to RM1,100 for Malaysia from 1 January 2019). Meanwhile, BNM noted that growth in private investment will be led by on-going multi-year projects in both export-and domestic-oriented industries. BNM expects the anticipated pickup in private sector activity to counterbalance the lower public spending as the Government undergoes its fiscal consolidation. We expect Malaysia’s real GDP growth to slow from 5.0% yoy in 1H18 to 4.6% estimated for 2H18, where we expect an average of 4.8% for 2018E (2017: 5.9%). Going forward, against the backdrop of modest but healthy growth in the global economy, we expect Malaysia’s real GDP growth to expand by 4.7% in 2019E (vs. the official forecast of 4.9%), reflecting slower growth in external demand but partly offset by healthy domestic demand.

BNM expects the country’s headline inflation to rise moderately in 2019, from the 1% yoy inflation rate registered in 2018 (3.8% in 2017). We believe this takes into consideration the possible upward inflationary pressure from higher global oil prices to the reintroduction of the weekly float for domestic retail petrol prices (RON95). However, BNM projects inflation to be lifted by the impact of the consumption tax policy, but the impact will start to fade towards the end of 2019. We expect the full-year inflation to average around 2.0-2.2% projected for 2019, higher than 1.0% in 2018, attributed partly to the proposed reintroduction of targeted fuel subsidies in 2H19, as well as the direction of global oil prices going forward, which we believe will be trending gradually higher. With continued uncertainties arising from global developments, we believe BNM will maintain its OPR at 3.25% throughout 2019, where the degree of monetary accommodativeness is consistent with ensuring sustained economic growth and inflation stability.

Source: Affin Hwang Research - 25 Jan 2019