OVERVIEW

● OPR maintained. Bank Negara Malaysia (BNM) held the Overnight Policy Rate (OPR) at 3.25% yesterday, its sixth and last Monetary Policy Meeting (MPC) this year. Again, it was of no surprise to the market. The statutory reserve requirement rate was also left unchanged at 3.50%. The MPC approved next year’s meeting schedule and the next one will be on 23 and 24 January of 2019.

● BNM sees growth momentum slowing. From the statement, BNM sees global economic expansion continuing with signs of moderating momentum. Nevertheless, it added that “risks to the global growth outlook remain tilted to the downside, with trade tensions continuing to be a key source of downside risk.” On continued volatility in international financial markets and monetary policy normalisation in some advanced economies, BNM opined that it “could lead to further capital outflows and financial market adjustments in emerging economies.”

● On the domestic economy: BNM admits that public sector spending “is likely to weigh on growth,” on “continued reprioritisation of expenditure.” Moderating global growth momentum would impede exports contribution to growth, it added. There seemed to be a contradiction of sorts. The MPC admitted that “domestic economy continues to face downside risks stemming from any further escalation in trade tensions and prolonged weakness in the mining and agriculture sectors,” However, it continues to ensure that “on balance, the Malaysian economy is expected to remain on a steady growth path in 2018 and 2019.” Since we expect the current weight of a growth slowdown is more in 2019, it is logical to presume GDP growth to be slower. Instead, the Ministry of Finance projects GDP growth to accelerate to 4.9% in 2019 from 4.8% this year. On the contrary, we project growth to slow to 4.7% from 4.8% projected for 2018.

● OPR outlook 2019: probability for a rate change remains low. Meanwhile, BNM expects inflation to expand in 2019 due to higher projected global oil prices and the floating of domestic fuel prices. While the jury is still out there on whether growth would accelerate or moderate, we stick to BNM’s perennial stance of supporting growth and price stability over the defence of currency. Whether the US Fed would stick to its rate normalisation plan of at least three more rate hikes next year it would not have any effect on BNM’s decision in a major way for now. Hence, we foresee no changes in the BNM’s monetary stance for 2019 barring an unforeseen external shock.

Source: Kenanga Research - 9 Nov 2018