OVERVIEW

● Stays put. Bank Negara Malaysia (BNM) Monetary Policy Committee (MPC) has decided to maintain the Overnight Policy Rate (OPR) at 3.00% yesterday, in line with house and market expectation after a decision to cut in May. The statutory reserve requirement ratio (SRR) was kept unchanged at 3.50%. The next MPC meeting will take place on 11 and 12 of September.

● A respite. The decision could have been made easier by the latest positive external signals. First being the better-than-expected US jobs data in June. Prior to that President Donald Trump decided to give Huawei its US supply chain back after calling a truce on the on-going US-China trade negotiations that stalled recently. Market rallied, providing a respite to investors as well as policymakers. This is reflected in BNM’s statement which MPC members noted that “the global economy continues to expand moderately.” It further adds that “the labour conditions in the advanced economies remain firm, while domestic demand continues to support growth in Asia.”

● Inflation to remain stable. BNM expect headline inflation in 2019 to be broadly stable compared to 2018. Similarly, we expect the current benign inflationary trend to continue for a while in the absence of strong demand pressures. Nonetheless any upside to inflation would be limited mostly due to elevated risks emanating from the external front.

● Downside risk concern remains. Primarily, a prolonged trade tensions, according to BNM, would soften the near term global economic outlook. Against this backdrop, the CPI growth is projected to further moderate to 0.7% from 1.0% in 2018. This along with a weaker growth trend would provide BNM more scope for monetary easing. A further deterioration in the global economic environment, a sluggish domestic demand, along with a clear signal from the Federal Reserve to embark on more than one rate cut this year may convince BNM to consider another 25 bps cut on the OPR this year. For now, we expect the OPR to remain at 3.00% this year on the expectation that the underlying inflation is expected to remain stable, supported by the continued expansion in economic activity in the 2H19.

Source: Kenanga Research - 10 Jul 2019