BNM Expect Stable Inflation But Downside Risks to Growth Remain

Bank Negara Malaysia (BNM) decided to maintain its Overnight Policy Rate (OPR) unchanged at 3.0% for the second consecutive meeting at the latest Monetary Policy Committee (MPC) meeting. This was in line with market expectations. The statutory reserve requirement (SRR) was also left unchanged at 3.5%, where it has been maintained since January 2016. In its latest assessment of the global economy, BNM maintained its cautious tone on global GDP growth as the recent escalation of trade tensions could likely lead to weaker global trade going forward. BNM also guided that there were more signs of spillovers of slowing trade growth to domestic economic activity in a few countries. Meanwhile, it was also highlighted that several central banks have also eased their monetary policy rates, which has eased global financial conditions. However, as uncertainties stemming from trade tensions and geopolitical developments persist, this could also lead to excessive financial market volatility.

As for the domestic economy, BNM expects healthy private consumption to support Malaysia’s economic growth amid stable labour market and wage growth. On the external front, BNM anticipates the diversified nature of the country’s exports to offset some of the negative impact of slowing global demand. Although its GDP growth projection was maintained at 4.3-4.8% for 2019, BNM guided that this forecast was subject to further downside risks from “worsening trade tensions, uncertainties in the global and domestic environment and extended weakness in commodity-related sectors.” BNM anticipates headline inflation to average higher (from the current low of 0.3%) for the rest of 2019 and 2020. However, headline inflation is expected to remain manageable due to the weakening impact of the change in tax policy changes, subdued outlook on global oil prices as well as policy measures to contain food prices.

Going forward, BNM guided that it will “assess the balance of risks to domestic growth and inflation to ensure that the monetary policy remains conducive”, similar to the statement made in its previous MPC statement in July. We believe BNM has maintained its policy rate in view of recent economic indicators that reflected some sustainability in the Malaysian economy, where real GDP growth expanded by 4.9% in 2Q19 on healthy private consumption growth, steady export growth of 1.7% yoy in July and manufacturing production of 4.0% yoy in July, indicating sustained real GDP growth in 2H19. We expect domestic demand, especially private consumption, to be the main driver of growth supported by stable labour market and wage growth. This was in line with recent Retail Group Malaysia’s forecast, where it projects retail sales to increase by 5.8% yoy estimated for 4Q19 (3.2% in 3Q19) amid year-end school holidays, Christmas season and promotion by retailers.

However, going into 2020, we expect some slowdown in the country’s real GDP growth due to potentially slower exports growth due to downside risks from further escalation of trade tariffs as well as possible sharper than expected slowdown in China’s economy. Therefore, we project Malaysia’s real GDP growth to be steady at 4.7% in 2019, (4.7% in 2018) which is in the higher end of the official forecast range of 4.3-4.8%, before slowing down to 4.5% projected for 2020. On monetary policy decision in the months ahead, apart from the US Fed’s decision on the Fed Funds rate, we believe BNM will also be monitoring the progress of trade war talks and its impact on Malaysia’s economy before deciding on further policy rate moves. Hence, we expect BNM will likely maintain its OPR at 3% in the last MPC meeting on 5th November 2019.

Source: Affin Hwang Research - 13 Sept 2019