OVERVIEW

BNM maintains OPR at 3.00%. BNM’s decision to maintain OPR at 3.00% was consistent with our expectation and the consensus forecast.

Growth prospects improving. While retaining its caution in light of recent volatilities and global uncertainties, the MPC has adopted a more optimistic tone in its growth outlook, projecting the economy to be on a recovery track in 2017.

Odds of further rate cuts receding. On the balance of probabilities, higher inflation and improved growth prospects suggests that the OPR will be maintained at 3.00%, at least for the short term. While inflation remains manageable, without a significant threat to the growth equation, we do not expect any further cuts in OPR.

OPR maintained at 3.00% as expected. In its first Monetary Policy Committee meeting of 2017, Bank Negara (BNM) maintained the Overnight Policy Rate (OPR) at 3.00%. The result was in line with our expectations; consensus forecast was likewise unanimous on OPR staying at 3.00%.

Growth modest; inflation stable but rising. While the MPC continue to take note of heightened uncertainties in global growth, its tone is slightly more optimistic compared to its November MPC meeting. The statement notes “some recovery in external demand” providing some support to growth.

Ringgit volatility continues to be on the agenda. The MPC notes reduction in ringgit volatility – and other emerging market currencies – which has previously spiked up at the tail end of 2016. This has, in part, been attributed to financial market development measures (including the curbs on offshore NDF markets, development of onshore ringgit hedging, treatments for investments in foreign currency assets and treatments of export proceeds). However, the MPC also notes that uncertainties in global growth, policy environment and geopolitical developments may spark fresh rounds of volatilities.

Quick Fed interest rate hike on the cards. In her latest statement, the Fed Chair, Janet Yellen, warns that further delays in raising interest rates risks springing a “nasty surprise”, be it in higher inflation, financial instability or both. This, along with her earlier views that “…fiscal policy is not obviously needed to provide stimulus to help us get back to full employment”suggests a more hawkish outlook for the Federal fund rate in 2017. Previously, in its December meeting, the Federal Reserve raised interest rates by 25bp, bringing the Federal Fund Rate range to 0.5-0.75%. Its statement further suggests three gradual rate hikes in 2017.

OUTLOOK

Reiterate OPR at 3.00% for 1H17. The latest MPC statement supports our view that Malaysia is on a steady recovery trajectory, albeit one riddled with uncertainties, particularly from external uncertainties. With full year inflation at 2.1% in 2016 (similar to 2015) but expected to rise in 2017 (at 2.5%, based on our 2017 estimates), we reckon that the odds of an OPR cut has receded, at least for the first half of 2017. External factors – including the Federal Reserve intent for three rate hikes in 2017, policy uncertainties and ringgit volatility – further reinforces our view of OPR staying pat.

In the longer term, however, significant deterioration in the growth equation may shift the focus back to a possible rate cut. In the short term, our views on OPR will be shaped by the release of the 4Q16 GDP results in February, the CPI inflation trajectory, the ringgit movements and other external factors including the policy directions from the incoming US President Donald Trump, post-Brexit framework from Theresa May and the relative success of OPEC’s ambitious production cuts. Moving forward, we are monitoring elections in the Western Europe (particularly in Netherlands, France and Germany) as sources of further shifts in the policy environment.

Source: Kenanga Research - 20 Jan 2017