• M3 moderates. Broad money supply (M3) growth moderated to 3.6% in February from 4.4% in the preceding month. Growth was likewise flattish on a MoM basis, expanding by just 0.2%.
• M1 growth takes a breather. M1 growth was likewise slower at 5.5% (Jan: 6.5%). This was the second consecutive month where M1 growth declined. In MoM terms, M1 growth was flat (Jan: 1.6%).
• Resource balance continues to ease. Banking system loans grew 5.3% (Dec: 5.6%) while its corresponding deposits likewise fell by 2.2% (Dec: 2.6%). On the balance, the loan-deposit ratio continued to ease, falling to 88.7 (Jan: 89.4) after its peak multi-year high in December (89.8%).
• Monetary condition stable. Relatively stable short term interest rates, moderate but stable capitalisation and modest M3 growth suggests continued health in Malaysia’s monetary and credit conditions remains healthy. Slower growth in the monetary aggregates suggests that inflation (CPI Inflation: 4.5% and 3.2% for Feb and Jan respectively) remains under control albeit elevated.
• Mild tightening bias; OPR likely to be retained. Higher cost-push inflation observed since the start of 2017 suggests that the MPC is likely to be quicker to react should demand-driven price pressures start rising. However, with broad price trends remaining stable, we believe that the MPC will likely retain the OPR at 3.00% pending significant shifts in price trends as it seeks to balance supporting growth and to ward off inflationary pressures.

February M3 growth slows. Broad money supply (M3 grew 3.6% (Jan: 4.4%) This comes after M3 climbed at its fastest pace since September 2015 during January 2017. On a MoM basis, M3 growth was flattish at 0.2% (+RM4.1b) compared to 0.9% (+RM15.1b) in January. As with the previous month, the growth in M3 continued to be driven by strong growth in loans to private sector (4.9 ppts contribution) though this was again offset by continued growth in the Islamic Investment Account (reflected by the fall in the “Other influences” subcomponent).

Liquidity expands at a slower pace. Narrow money (M1) growth was likewise slowed to 5.5% YoY in February from 6.5% in January. M1 growth took a step back after growing at its fastest pace since expanding for five consecutive months to its fastest pace since November 2015. On a MoM basis, M1 growth was nearly flat (-RM0.1b), largely from a 4.4% decline in currency in circulation (Jan: +8.0%)

Credit growth stabilises. Growth in outstanding banking loans rose by a slightly lower 5.3% YoY (Jan: 5.6%) and was unchanged on MoM-basis (Jan: 0.4%). February’s loan growth was largely attributable to continued strong 5.1% growth in household loans (Jan: 5.2%) and, to a lesser extent, loans to the real estate sector (Feb: 10.6% v. Jan: 11.4%) and the finance, insurance and business activities sector (Feb: 7.1% v. Jan: 8.7%). Grouped by loan purposes, loan growth was driven by purchase of residential property (Feb: 9.1% v. Jan: 9.1%) and working capital loans (Feb: 6.3% v. Jan: 6.1%).

Deposits see modest expansion. On the other side of the resource balance equation, deposit growth was dialled down to 2.2% YoY (Jan: 2.6%) though in MoM terms, deposit growth was largely sustained at 0.3% (Jan: 0.4%).

Loan ratios improved. Despite the slight moderation in deposit growth, monthly deposits growth (RM5.2b) continued to exceed loan growth which fell slightly by RM608m. This resulted in a marked improvement in the Loan-to-Deposit Ratio (LDR) which fell to 88.7 from 89.4 in January. This improvement was further reflected in BNM’s alternative banking sector liquidity indicators including the loan-to-fund ratio which fell to 83.4 (Jan: 84.0).

Lending rates stable. Short term rates were practically flat relative to January. The weighted average base rate of commercial banks remained at 3.62%, unchanged from January while weighted average lending rates on outstanding loans was only marginally higher at 5.21% (Jan: 5.20%). Stable lending rate and continued – albeit slightly moderating – money supply growth supports the findings of stable monetary conditions.

OUTLOOK

Loan growth takes a breather. We are somewhat positive on the moderation in the monetary aggregates, especially in the context of rising consumer inflation which we are starting to observe in January and February (and likely for 1H17). This, combined with more prudent loan growth, suggests that underlying demand-based inflation remains stable overall though the modest growth in monetary aggregates implies that upsides to growth remain intact.

Inflation in check; OPR likely retained. While we do see some mild tightening bias, this is contingent on a stronger upside to recovery and, perhaps more importantly, the presence of a stronger demand-pull inflation. At present, core inflation remains manageable though just slightly elevated at 2.5% in February (January: 2.3%). At present, we believe that the prevailing 3.00% OPR continues to be both accommodative of growth, while sufficient in containing inflation.

Source: Kenanga Research - 3 Apr 2017