OVERVIEW

● OPR maintained. Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) unchanged at 3.25% yesterday, its first Monetary Policy Meeting (MPC) this year, in line with house’s and market’s expectations. The statutory reserve requirement rate was also maintained at 3.50%. The next MPC meeting will take place on 4 and 5 March.

● Balance to downside risk up. In its statement, BNM said that “global growth momentum is moderating with slower growth in the major economies”, giving a slightly pessimistic tone as compared to the previous MPC statement whereby it stated that “the global economic expansion continues, although with signs of moderating momentum.” While trade tensions were often quoted as one of the key downside risks, BNM is now pointing towards materialisation of the risk, by stating that “trade tensions are beginning to have a material impact on global trade and investments”. In addition, BNM opines that “tightening financial conditions and heightened volatility in financial markets, coupled with country-specific factors ranging from heightened political and policy uncertainty and elevated debt levels” may hamper growth projections. Overall, BNM remains cautious, with its risk assessment “tilted to the downside”, citing “potential escalation of trade tensions and commodity-related shocks” as the primary risks.

● Sustained domestic economic expansion to offset lower public spending and exports. Despite the slowdown observed at the global front, domestically, “latest indicators point towards sustained economic expansion”. BNM is of view that for this year, “the Malaysian economy is expected to remain on a steady growth path”, with “sustained growth in private sector activity expected to offset lower public spending”, amid the ongoing fiscal consolidation. However, “the external sector is likely to soften” against the backdrop of tapering global growth.

● Emerging signs of dovishness, but probability of a rate cut remains low. BNM tones down its inflation expectation in 2019, describing it as “moderately higher” (previous MPC statement: “inflation is projected to increase”), with the trajectory to “be dependent on global oil prices”. While it remains to be judged whether external slowdown will weigh on domestic activity, the US Fed’s shift towards dovish approach to rate hikes provides BNM ample room to maintain its accommodative monetary policy stance, in line with our expectation of an unchanged OPR for 2019.

Source: Kenanga Research - 25 Jan 2019