- Just as hoped, the Bank Negara Monetary Policy Committee (BNM MPC) opted to retain the Overnight Policy Rate (OPR) at 3.00%. Fundamentally, the central bank continues to look at the global economy as a whole to be on the road to recovery. However, they have noted that recovery has been bumpy, both in the developed economies as well as those in the emerging markets. There continues to be some strong caution on strong volatilities persisting in the financial markets as a result of policy changes and geopolitical uncertainties. Regardless, the current OPR level is believed to remain supportive of the Malaysian economy.

- US Federal Reserve chairwoman, Janet Yellen has mentioned that the Fed will continue ahead with their tapering of the QE programme, of which is currently at US$65b worth of bond purchases a month. Though this is indicative of the Fed’s confidence of a recovery in the US economy, the early part of the year has been plagued by severe weather hitting much of the Northeast, Midwest and Upper Midwest of the US, dragging on employment (only 139,000 jobs were added in February, a far cry from 160,000 that was expected) and slackening the services sector (non-manufacturing PMI dropped to a 43-month low at 51.6, tethering at the edge of the 50-point expansion level). On the other hand, manufacturing continues to improve (manufacturing PMI jumped to 57.1 in February from 53.7 in January) and sentiment moving forward is more upbeat than not, which goes to say that despite the weather, businesses and consumers alike have positive outlooks on the economy.

- In other parts of the world, the crises in Ukraine has been roiling the European markets, especially the commodity market as 25% of Europe’s gas needs comes from Russia, with half of it being pumped via gas lines through Ukraine.

Though the situation there is least likely to directly impact much of the Western economies (unless the situation turns into an all out war), the uncertainty of it (and situations alike it in other parts of the world) may question investor’s confidence in other developing economies. Currencies in emerging economies have already been particularly hard hit due to capital outflows, and may suffer further downfall if political uncertainties further nudge investors to head towards safer havens like the US, UK, Germany and Japan. In China, economic growth is set to be expanding at a slower pace as the country implements political and economic reforms after years of runaway expansion. They are setting the GDP to grow at 7.5% in 2014, slower than the 7.7% seen in 2013. Those in Asia may suffer from the backlash of China’s reforms hitting business trade.

- Here at home, Malaysia continues to withstand net outflow with not much qualms. Indicators have pointed to strengthening exports, which is predicted to further improve throughout the year and becoming of the main driver of this year’s economic growth. The same can be said for private sector investment spending and expansion, and infrastructure expansion under the ETP, supporting our 2014 GDP forecast of 5.0%-5.5%.

- However, domestic demand has been taking the backseat of late, by and large the result of fiscal consolidation. The rise in the price levels has been biting into the pockets of consumers, especially those in the middle income and not eligible for BR1M. More recently, on-going draught is disrupting supply and putting pressure on prices. On a whole, it is mainly the increase in cost-push factors that’ll inflate prices, of which we project to be about the 3.3% level in 2014 (2013: 2.1%). In addition to that, an expectation of further price increases once the GST comes into play (April 2015) could very well mean reluctance to spend among the middle and lower income to prompt higher demand pull inflation.

- These justifications support our belief that BNM is unlikely to raise the OPR in 2014, keeping it at 3.00%, a level shown to be supportive of domestic growth. Though the external situation is beyond our control, we are confident that BNM will act accordingly to ensure the stability of the Malaysian economy.

Source: Kenanga