OVERVIEW

• Bank Negara Malaysia (BNM) kept its Overnight Policy Rate (OPR) unchanged at 3.00% in line with consensus and our expectations.
• In its monetary policy statement, BNM reiterated that the “degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation.”
• In the absence of guidance on future changes to the OPR, we view that there is still room for another rate cut if there are signs that the prevailing uncertainty could manifest itself, dragging the economy down.
• With an almost certainty of a rate hike by the Fed on Dec 13-14 as well as the downside bias of the value of the ringgit we believe the probability of a rate cut seems rather remote at this juncture. Along with a slightly better domestic growth prospect next year we expect there would be no change, ceteris paribus, to the OPR in 2017.

Unanimous expectation. BNM’s Monetary Policy Committee (MPC) decided to keep its overnight policy rate (OPR) unchanged at 3.00% in line with consensus and our expectations. All the economists and analysts polled by both Bloomberg and Reuters unanimously predicted no change to the OPR.

Heightened uncertainties. The BNM decision also reflect the concern of rising volatility of emerging market currencies including the ringgit following the U.S. elections and growing certainty of a Fed rate hike decision in December. Since November 8, the ringgit loss about 5.5% of its value against the US dollar, which currently trades at around 4.44. This also prompted BNM to order a stop to ringgit offshore non-deliverable forward (NDF) trades. The surprising victory of Donald Trump raises uncertainty on the global economy and capital markets. BNM noted that that there are “uncertainties arising from risks of protectionism and financial market volatility… Global financial market conditions are likely to be susceptible to policy and market developments”.

Fed rate hike risk. Meanwhile, Federal Open Market Committee (FOMC) officials of the U.S. Federal Reserve are nearing a decision to raise interest rates for only the second time since the end of ZIRP in December 2015. The probability of the Fed to raise interest rates at its last meeting this year in December seems certain according to Bloomberg’s probability metrics.

A stabiliser. The decision also reflects part of BNM’s effort to stabilise the financial market and reduce volatility while assuring that “the capital market remains accessible, deep and liquid. Banking system liquidity is ample.” It adds that “financial institutions continue to operate with strong capital and liquidity buffers and the growth of financing to the private sector is consistent with the pace of economic activity.”

Under control. In its monetary policy statement, BNM reiterated that the “degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation.” It further assured that “the risk of destabilising financial imbalances has been contained.” This is usually followed, without fail, with the MPC vowing to monitor these risks.

Outlook

Policy flexibility. In the absence of guidance of future changes to the OPR, we view that there is still room for another rate cut if there are signs that the prevailing uncertainty could manifest itself, dragging the economy down sharply.

Stability and recovery. With an almost certainty of a rate hike decision by the FOMC on Dec. 13-14 as well as the downside bias of the value of the ringgit we believe the probability of a rate cut seems rather remote at this juncture. We concur with BNM that “inflation is expected to remain relatively stable in 2017 given the environment of low global energy and commodity prices, and generally subdued global inflation.”

Better 2017 outlook. We also ascribe to BNM’s view that the baseline assessment for global growth to improve slightly in 2017 on the back of “the developed economies shifting towards progressive use of fiscal policy, leading to a more balanced policy environment that would support global growth going forward.” Along with a slightly better domestic growth prospect next year we expect there would be no change, ceteris paribus, to the OPR in 2017.

Source: Kenanga Research - 24 Nov 2016