• OPR expectedly maintained at 3.00%. The Monetary Policy Committee (MPC) kept the Overnight Policy Rate (OPR) at 3.00% after its second-last meeting for the year, in line with the unanimous market and the house expectation.
• Sustained global growth. The MPC notes that global growth momentum, particularly with regards to external trade, helped sustain the upside to domestic growth; domestic demand will remain robust on positive labour market conditions and strong investment flows. However, policy risks of major economies and geopolitical concerns continue to be a concern.
• Inflation concerns recede further. The MPC sees inflation easing further as global cost factors take a backseat. While domestic demand is expected to nudge up underlying inflation, core inflation is likely to be contained at prevailing rates.
• Neutral OPR outlook backed by stronger growth; moderating inflation. We maintain our prior stance that the OPR is likely to remain at 3.00% for the rest of 2017. Easing inflation and threat to global growth justifies a neutral stance to maintain growth-friendly monetary conditions.

OPR maintained at 3.00%. The MPC held the OPR at 3.00% at its fifth and second-last meeting of the year on Thursday, in line with the unanimous Bloomberg consensus survey of 21 respondents and the house expectation. This announcement places the OPR at 3.00% for at least 16 consecutive months; the MPC last cut the OPR during its July 2016 meeting over growth concerns.

Global momentum sustained. The MPC confirmed its July assessment of global growth, singling out the pickup in global trade. It maintains its upbeat assessment of the advanced market economies (AMEs) both from improved consumption and investments. Regionally, the MPC confirmed its July’s comments of growth stemming from domestic activity and strong external demand. The MPC concludes that these points to sustained momentum in global growth. However, the MPC sees possible disruption to this outlook amidst policy and political uncertainties among major economies, along with geopolitical risks. This echoes Bank Negara (BNM)’s Monthly Highlights for July, which noted concerns over the US administration’s ability to deliver its much vaunted fiscal reforms by President Trump, along with the US-North Korea tensions over the latter’s nuclear programme.

Stronger-than-expected growth for 2017. Building on the higher 5.8% growth observed in Malaysia during 2Q17 (1Q17: 5.6%), the MPC expects growth to be stronger than previously expected – BNM previously targeted a growth range of 4.3-4.8% for 2017. With a more buoyant outlook of the global economy, the MPC expects vibrant growth in the external sector to result in higher spillover benefits to the domestic economy. In addition, the MPC expects improving income and other labour market conditions, new and ongoing infrastructure projects and sustained capital investment in the manufacturing and service sector to be supportive of the expansion of domestic demand.

Inflation threat continues receding. MPC notes continued moderation in headline inflation, largely stemming from the decline in domestic fuel prices, at least relative to 1Q17. July’s inflation was substantially lower at 3.2% (Jun: 3.6%) relative to May’s 3.9% (i.e. the last reading available when the MPC last convened in July), continuously falling from its 5.1% peak in March. While the MPC expects underlying inflation, as measured by core inflation, to be sustained by stronger domestic demand, they expect inflation to remain contained overall. Core inflation edged up to 2.6% in July (Jun: 2.5%) though it was similar to May’s 2.6%.

Monetary conditions supportive of growth. The MPC notes that the ringgit has strengthened and is closer to Malaysia’s economic fundamentals. The MPC previously attributed this to the implementation of two financial market development measures in response to the ringgit NDF crackdown late last year. Capital and liquidity buffers in the banking system continue to be adequate in maintaining financial system stability while being overall supportive of economic activity.

OUTLOOK

Confirms July’s outlook. The September MPC statement essentially confirms July’s narrative of a strong global macroenvironment and its positive implication on the domestic economy. Whereas July’s monetary policy statement was based on stronger prospects, September’s statement revolved more around the realisation of these prospects, as exemplified by Malaysia’s strong 2Q17 growth of 5.8% relative to the annual 4.2% growth during 2016.

Largely consistent with house expectations. On Malaysia’s growth outlook, the monetary policy statement was largely in line with our assessment of growth and inflation. Similar to our view, the MPC considers the prevailing 3.00% OPR to be accommodative to economic activity while adequate in maintaining stable, albeit elevated, inflation. Our base case outlook on inflation remains at 4.1%, allowing for some transitory effects of higher global oil prices to nudge up inflation. In light of a stronger-than-expected 2Q17 GDP growth, we have recently raised our full-year GDP forecast to 5.4% (previously 5.3%) on a more buoyant manufacturing sector outlook along with continued external demand momentum. This is consistent with the MPC’s view of growth likely exceeding BNM’s previous GDP growth range of 4.3-4.8% for 2017.

Growth-friendly OPR to stay. With just one more scheduled monetary policy meeting for the year in November, we do not see any striking reasons to alter the current 3.00% OPR for the rest of the year as inflation is likely to have peaked in March. While there are nascent signs of inflation increasing a touch on possible tightness in global oil supplies and improved domestic demand, we believe that the inflation is likely to remain manageable and is expected to gradually taper off towards year end. This is especially true given the likely transitory global oil supply issues (largely stemming from inclement weather conditions in the US).

Risks to global growth a consideration. For now, we believe that a neutral BNM policy stance will allow domestic demand to maintain its robust growth moving forward while remaining sufficiently strict in reining in demand pull pressures. With the MPC echoing BNM’s concern that geopolitical tensions and policy risks may threaten domestic growth, we believe that this reinforces the case for maintaining rates at 3.00% to ensure relatively accommodative monetary conditions in the event that these risk areas materialises.

Source: Kenanga Research - 8 Sept 2017