BNM Continued to be Cautious Over the Global Growth Outlook

Bank Negara Malaysia (BNM) kept its Overnight Policy Rate (OPR) unchanged at 3.0% at its latest Monetary Policy Committee (MPC) meeting, following its recent 25bps cut in May 2019. The statutory reserve requirement (SRR) was also unchanged at 3.5% since January 2016. BNM noted that the “stance of monetary policy remains accommodative and supportive of economic activity”.In BNM’s latest assessment of the global economy, it continued to be cautious over the global growth outlook, due to weak global economic leading indicators, where trade tension between the US and China was cited as the primary downside risk. Meanwhile, BNM also highlighted that labour conditions in advanced economies remained firm while in Asia, domestic demand continued to support growth in the region.

As for the domestic economy, BNM expects Malaysia’s external sector to be weighed down by slower global growth, trade tensions and extended weakness in commodity-related sectors. However, domestic demand will be supportive of growth on the back of “stable labour market conditions and capacity expansion in key sectors such as manufacturing and services.” However, in 2H2019, we believe the implementation of infrastructure development projects and capital spending in the manufacturing and services sectors will support investment activity in Malaysia. Besides that, growth in private consumption will also be supported by some measures introduced by the government, such as the second (from 28 May) and third phases (in August) of Bantuan Sara Hidup (BSH) cash assistance as well as the ongoing tax refund, which is expected to be completed by October 2019. Hence, with healthy domestic demand, we are maintaining our real GDP growth projection of 4.5% in 2019 (4.7% in 2018), which is within the official forecast range of 4.3-4.8%.

On the inflation front, BNM anticipates headline inflation to remain stable in 2019 with some upward pressure projected in the coming months once the impact of the changes in consumption-tax policy weakens. Meanwhile, underlying inflation is expected to remain stable due to the absence of strong demand pressures and continued economic activity. Similarly, we believe some upward inflationary pressure in 2H2019 from the possible removal of the retail price cap on RON95, once the fuel target subsidy is implemented. In addition, the lower base from the previous year after the zero-isation of GST between June and September will also contribute to higher inflation in the second half of the year. We expect the full-year inflation to average around 1.2-1.3% this year.

Going forward, global trade tensions continue to be one of the key downside risks to both global GDP growth and the Malaysian economy. However, we believe that unless trade tensions escalate further to a full-blown trade war, we believe BNM would likely maintain its OPR at the current level. In the latest trade-talk developments, both the US and China agreed to restart trade talks at the G-20 Summit. President Trump also stated that Huawei restrictions would be eased, reflecting some progress in trade negotiations. As such, BNM will likely wait and assess further the trade-talk developments before deciding on any further rate cuts going forward. This was also reflected in its statement, where it guided it will “assess the balance of risks” in order “to ensure its monetary policy stance remains conducive to sustainable growth amid price stability”. We expect BNM to keep its OPR at 3% in the remaining monetary policy meetings on 12th September and 5th November 2019.

Source: Affin Hwang Research - 10 Jul 2019