Inflation to be Stable While Domestic Growth to Remain Steady

Bank Negara Malaysia (BNM) maintained its Overnight Policy Rate (OPR) at 3.25%, where the policy rate has been left unchanged since the last 25bps rate hike in January 2018. The statutory reserve requirement (SRR) at 3.5% was also kept unchanged. In its latest assessment of the global economy, the MPC statement maintained a cautious tone on the slowing global economic growth, as seen in most major advanced and emerging economies.

This was partly reflected in the latest global manufacturing PMI in February, which dropped to a 32-month low of 50.6 in February (50.8 in January), due to slower growth in the US and contractions in Japan and euro area. Similarly, China’s authority recently lowered its economic growth target to 6.0-6.5% in 2019, from its previous target of “about 6.5%” (6.6% in 2018), reflecting trade war tensions with the US. Consistent with the assessment made by BNM, it noted that if trade tensions go unresolved, it will be the one of the main drags on global growth as it affects both global trade and investment. Besides that, BNM stated that tighter financial conditions and political and policy uncertainty will also cause financial market volatility.

On the domestic economy, BNM continues to expect domestic demand to be the main driver of growth in 2019, where private sector spending is anticipated to support growth, where stable labour market conditions and capacity expansion in key sectors will boost household and capital spending. Meanwhile, BNM noted that downside risks to Malaysia’s economic growth from the external demand, citing possible uncertainties in the global and domestic front as well as continued weakness in the commodity-related sectors. Going into 2019, we expect Malaysia’s real GDP growth to expand by around 4.6% yoy in 1H19, before recovering to 4.8% estimated for 2H19. For the full year, real GDP growth will likely average at a steady pace of 4.7%, similar to the growth rate of 2018. We believe BNM, which will release the Annual Report on 27 March 2019, will likely maintain the country’s growth target at about 4.6-4.9% for 2019. We concurred that the domestic economy will be supported by private consumption and private investment. Besides that, we believe steady allocation for development expenditure may also support construction activity. However, the strength and sustainability of Malaysia’s real GDP growth will also depend on developments in the global environment, especially if the trade tensions escalate.

On the inflation front, BNM cited that the decline in headline inflation by 0.7% yoy in January, for the first time since November 2009, was due mainly to negative transport inflation at -7.8%. As such, BNM expects inflation to remain low in the near term due to policy measures, such as the price ceiling on domestic retail fuel prices until the end of 1H2019 as well as the impact of the changes in consumption tax policy. In 2019, BNM expects headline inflation to be stable in 2019 (1% in 2018) possibly due to the anticipated dissipating impact of the consumption tax policy towards the end of the year. BNM also guided that the trajectory of headline inflation will be largely dependent on global oil prices. We expect the full-year inflation to average around 1.5-2% projected for 2019 as the country’s underlying inflation is expected to be sustained. We believe BNM will likely remain accommodative throughout 2019 in order to ensure continued domestic growth and stable inflation, with our expectation that OPR will remain unchanged at 3.25%.

Source: Affin Hwang Research - 6 Mar 2019