- Bank Negara Malaysia (BNM) has decided to keep the Overnight Policy Rate (OPR) at 3.00% yet again. Although it has a more positive outlook on the economy the uncertainty in the global economy, especially on China and Europe, remains. Rising inflation will not be enough to justify a rate hike as cost push factors dominates. Domestically, the plight of those in the lower income as cost of living increases may also be taken into consideration. With Goods and Services Tax (GST) to be implemented in less than a year, the likelihood for BNM to raise interest rates even next year is relatively low.

- As expected, the BNM Monetary Policy Committee (MPC) has decided to keep the Overnight Policy Rate (OPR) at 3.00%. The central bank’s outlook on the global economy this time round is more positive and has noted that any moderation in the 1Q14 of the year is temporary. Moving forward, both the developed economies and emerging markets are expected to retain a steady upwards growth for the rest of the year. Financial markets have also steadied as impact from geopolitical uncertainties remains contained and adjustment towards policy changes have normalized.

- Severe winters in the US pulled back investment and stunted consumption in the 1Q14 that it’s GDP expanded by just 0.1%. However, this pent-up demand is expected to recover quickly in the following spring and summer months. Despite the cold, consumer spending still expanded in those first three months of the year and was latest seen to have expanded by 0.9% for the month of March, the biggest gain since August in 2009, paving way for further upward trajectory heading into the second quarter. Manufacturing activity has also been on the upward trend, last seen rising to 54.9 in April, up from 53.7 in March. A reading above the 50-point mark indicates expansion.

- Alongside a continued fall in the unemployment rates (last recorded at 6.3% - lowest level since 2008), it gives little reason for the Federal Reserves to stop tapering the QE programme, which has now scaled back to US$45b a month. That’s not to say that the Fed can now grow complacent, as labour market conditions remains a thorn on the side of the US economy – labour participation rate at 36-year lows. The Fed still needs to keep a high degree of monetary accommodation to support the jobs market.

- Here in Asia, there are some concerns in Japan over the impact of its new tax hike towards domestic demand. However, the spike in consumption prior to the implementation of the hike would help mitigate the downside effects of the hike. Retail sales prior to the tax hike reached a 17-year high. Similarly, stimulus measures are expected to help further mitigate impact of the tax hike.

- In China, internal restructuring and policy changes will take some time to normalize and China’s growth is expected to moderate. However, a GDP target of around 7.5% is still a relative strong pace and improvements of demand from developed economies offers some support to China’s growth. Exports improvement will also be one of the main economic drivers throughout the Asian region.

- Here at home, Malaysia has begun to see net inflow again as foreign buyers slowly return to our shores on favourable economic and financial conditions. Exports continue to improve and is predicted to further strengthen throughout the year thus becoming one of the main drivers of 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%.

- This will help to mitigate moderation in domestic demand, which will have to go through a round of penny pinching as a result increased prices. Though overall inflation has begun to normalize following fiscal consolidation steps, it is still expected to remain on the high side for most of the year. We project that the CPI level could average at 3.3% in 2014 (2013: 2.1%).

- Though spending is expected to go through a spike prior to the GST implementation, there is also possible reluctance to spend among the middle and lower income on expectation of further price increases. This justifies 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.

Source: Kenanga