OVERVIEW

• OPR unchanged as expected. The Monetary Policy Committee (MPC) decided to maintain its Overnight Policy Rate (OPR) at 3.25% in line with house’s and the market’s expectation
• Maintained upbeat growth prospects. The MPC expects positive global growth outlook and spill overs from exports to the domestic economy to sustain Malaysia’s growth trajectory in 2018.
• Inflation to slow in 2018. There was virtually no change in BNM’s outlook and argument for a slowing inflation this year, reiterating its view that headline inflation trend to remain dependent on global crude oil price.
• Another rate hike a possibility but a diminishing prospect. We maintain our view that there is still room for another 25-basis point (bps) rate hike but is increasingly limited and largely dependent on external factors (US Fed rate normalisation, the impact of Trump’s policy on trade, infra spending, tax reforms, etc).

BNM expectedly maintains OPR. The MPC has decided to maintain the OPR at 3.25% at its second meeting of the year on Wednesday after a 25 bps rate hike at its last meeting on 25th January. This is in line with house’s and the consensus expectations. Meanwhile, the statutory reserve requirement (SRR) rate was also left unchanged at 3.50%.

Maintain growth upbeat outlook. Similar to the previous assessment on the economy, the language in the Monetary Policy Statement (MPS) almost sounds familiar,with few changes. The MPC stated that “the global economy continues to strengthen further,” with growth in Asia to be “driven by sustained domestic activity and strong external demand”. It reiterated that risks to the global growth outlook to “remain balanced, pointing towards continuity in global economic expansion.”

Domestic demand key driver of growth in 2018. BNM seems to remain sanguine about the economic growth prospects in spite of the fact that it might slow this year. It continues to believe that “growth prospects will be sustained by the positive global growth outlook and spill overs from the external sector to the domestic economy.” The growth momentum would remain sustainable going into 2018 or at least till 1H18. Following better-than-expected 4Q17 growth of 5.9%, we have revised up our 2018 GDP forecast to 5.5%, the upper end of the official forecast of 5.0%-5.5%. The MPC expects domestic demand to remain the key driver of growth, “with additional impetus from the external sector.”

Inflation to slow in 2018. There was virtually no change in BNM’s outlook and argument for a slowing inflation this year. BNM expects the stronger ringgit to mitigate higher energy and commodity prices in 2018. Improving labour productivity and investments for capacity expansion is also expected to dampen underlying inflation. In a nutshell, the MPC projects inflation to moderate in 2018, reiterating the view that headline inflation trend to remain dependent on global crude oil price. We forecast CPI growth to moderate to 2.8% from 3.7% in 2017.

OUTLOOK

No let up in momentum. The MPC’s assessment of the economic growth trajectory reaffirms our view that there is still no let up in growth momentum though GDP growth has started to moderate. We expect the growth acceleration in the 2H17 would provide enough momentum to generate positive spill over into 2018 primarily in the 1H18 which is expected to outpace the 2H18’s growth.

Another rate hike a possibility but a diminishing prospect. We maintain our view that there is still room for another 25-basis point (bps) rate hike but is increasingly limited and largely dependent on external factors (US Fed rate normalisation, the impact of Trump’s policy: on trade, infra spending, tax reforms, etc). Furthermore, as the economy moves further into 2018, the likelihood for BNM to raise interest rates theoretically diminishes as economic growth moderates or moves towards below trend. In addition, we do not think that any unpopular policy that would affect consumer welfare would be announced before the 14th General Election (GE14), which is expected to be held in late April or early May. Therefore, a rate hike after the GE14, is a better bet provided the macro environment is conducive.

Source: Kenanga Research - 8 Mar 2018