OVERVIEW

● No change to OPR. Bank Negara Malaysia (BNM) maintained the Overnight Policy Rate (OPR) at 3.25% yesterday, its fourth monetary policy meeting this year. Chaired by newly-appointed Governor Datuk Nor Shamsiah Mohd Yunus, the Monetary Policy Committee (MPC) decision came widely expected. The statutory reserve requirement (SRR) rate was also left unchanged at 3.50%. The next monetary policy meeting is on 5 September.

● BNM sees downside bias on growth. Nevertheless, we observed there has been a change in the view of the overall growth outlook. In a statement, the MPC underlined that “the balance of risks to the outlook has tilted to the downside,” compared with “the prospects for the Malaysian economy remain strong,” in its previous meeting. The MPC also said “the intensification of global trade tensions could affect sentiments and weigh on trade, investment and consumption.” It also cautioned that “coupled with ongoing monetary policy normalisation in the advanced economies, shifting investor expectations and sentiments could lead to further capital outflows and financial market adjustments in some emerging economies.”

● BNM sees lower inflation. In line with our reading, BNM said that “the headline inflation for 2018 is projected to be lower than earlier forecast taking into consideration the impact of recent policy measures on domestic cost factors.” The impact of these measures, namely the zero rating of the Goods and Services Tax and fuel subsidy, on inflation, according to BNM “is transitory.” On this note, it is highly expected that the official CPI forecast of 2.0%-3.0% for 2018 to be revised. We had earlier revised our 2018 CPI forecast to 1.8% from 2.8%. BNM also noted that it expects core inflation “to remain relatively stable in line with sustained domestic demand.”

● OPR outlook: no change till year end. Based on BNM’s rather less cheery assessment on the economic prospect as well as a benign inflation outlook, we do not foresee that it would make any changes to its current monetary stance. Though BNM appear to be dovish, we reiterate our view that the OPR will remain on hold until the end of the year. Moreover, BNM has stated that despite “the heightened financial market volatility, the domestic monetary and financial conditions remain supportive of economic growth.” This is in view that the US Federal Reserve has signalled two more rate hikes by year end which may trigger more funds outflow from the emerging markets. The possibility that the current trade tension would escalate and turn into a global trade war would also adversely affect the markets.

Source: Kenanga Research - 12 Jul 2018