Bank Negara Malaysia (BNM) maintained an accommodative monetary policy stance and left the Overnight Policy Rate (OPR) unchanged at 3.25% for the seventh straight Monetary Policy Committee (MPC) meeting and the fifth of six such meetings scheduled for this year. In the time since the MPC last convened, the ringgit has lost 12.4% of its value relative to the US dollar on massive capital outflows, the People’s Bank of China further eased monetary policy with a 25-basis point cut while the central banks of India, Indonesia, South Korea and Thailand decided to hold off further easing. In its monetary policy statement, BNM maintained its full year GDP forecast at 4.5% - 5.5% and reiterated that the current OPR remains supportive of economic activity despite downside risks to growth. With the US Federal Reserve poised to make a rate hike decision before the year end with repercussions for global financial markets, we expect BNM to hold the OPR at 3.25%. Despite a recent uptick in consumer prices, inflation concerns will continue to rank low among factors affecting monetary policy decisions.

• This is the seventh MPC meeting in a row with the OPR left unchanged since a one-off increase of 25 basis points to 3.25% in July 2014. The decision by the MPC is in line with market polls which unanimously predicted no change to the OPR.
• Since the last MPC meeting on July 9, the ringgit has depreciated 12.4% against the US dollar and breached the USDMYR 4.30 level. That and an unexpected US$0.2b increase in foreign exchange reserves in the second half of August suggests that BNM has eased of intervening to slow the ringgit’s decline in forex exchange markets.
• With the direction of the ringgit now almost entirely determined by market forces, BNM expects the ringgit to remain undervalued until “external and domestic uncertainties recede,” after which the local currency will regain strength to better reflect the underlying fundamentals of the Malaysian economy.
• Despite the emergence of “downside risks to growth” for the Malaysian economy, BNM assured that the current OPR remains accommodative and supportive of economic activity. While its monetary policy stance remains unchanged BNM also reassures the need to increase its vigilance on the financial markets.
• As such we maintain the view that the current monetary stance will remain for the remaining meeting this year and further expect no change to the OPR in the near-term, barring any unforeseen risk to growth.
• Although central banks in Brazil, Turkey and Russia have this year used higher monetary policy rates in responding to capital outflow and currency depreciation, we do not view as likely the possibility of BNM following suit should the ringgit continue to decline further.
• More likely is the introduction of temporary capital control measures to slow the departure of foreign funds and encourage the repatriation of Malaysian capital overseas.
• BNM’s outlook for the Malaysian economy is that of modest growth. Despite slowing private consumption following GST implementation, the economy is expected to expand in line with expectations. Domestic demand continues to be a significant support to the economic in the face of weak external demand.
• Since the last MPC meeting on July 9, the People’s Bank of China has further eased monetary policy with a policy rate cut of 25 bps and the yuan was allowed to depreciate closer to its true value. Other central banks in India, Indonesia, South Korea and Thailand decided to hold off further easing.
• Our assessment of historical movements in the OPR in relation to global manufacturing PMI, a proxy for worldwide aggregate economic growth shows that manufacturing activity is well under the 54 global PMI reading that would trigger a rate hike bias. Conversely, it is still far above the 40 point mark that would beckon BNM’s monetary policy to lean on a rate cut.
• The main focus now is on the coming Federal Open Market Committee (FOMC) meeting on September 16 and 17. The market views the possibility of the FOMC raising the feds funds rate during the upcoming meeting as increasingly unlikely with a 26% probability according to market polls.
• Other opportunities for a rate hike are during the October and December meeting. We view with almost absolute certainty that the FOMC will raise rates on at least one occasion this year as its credibility is at stake. Once the first and subsequent rate hike takes place, volatility in financial markets will ease and this may increase BNM’s possibility of making necessary adjustments to its monetary policy.

Source: Kenanga Research - 14 Sep 2015