● M3 growth edged higher to a 17-month high in July (6.1% YoY; Jun: 5.6%) due to the aggressive monetary policy easing throughout 1H20 and MYR295.0b stimulus package allocated to support the economy

- MoM: moderated to a 5-month low (0.5%; Jun: 0.7%).

- Growth was supported by persistent double-digit expansion in M1 (15.7%; Jun: 13.1%), partly a reflection of a bullish stock market, outpacing moderation in narrow quasi-money (3.8%; Jun: 4.0%) and a further contraction in deposits placed with other banking institutions (-58.0%; Jun: -55.0%).

● Broad money expansion due to higher growth in public spending, private sector and net external reserves

- Net claims on government (49.0%; Jun: 38.7%): surged to a 15- month high on sharp increase in credits extended to the government (26.5%; Jun: 19.3%), largely to finance the economic stimulus package.

- Claims on the private sector (4.4%; Jun: 4.2%): increased to a 10- month high on increased holdings of securities (5.1%; Jun: 4.6%) by the banking system.

- Net external reserves (3.1%; Jun: 2.8%): edged higher onthereturn of positive growth of net foreign reserves by the banking system (0.8%; Jun: -2.5%) since December 2018.

● Loan growth accelerated to a 14-month high (4.5%; Jun: 4.1%)

- By purpose: driven by higher growth in loans for the purchase of residential (7.4%; Jun: 6.9%) and non-residential property (2.3%; Jun: 1.4%) due to the low interest rate environment. Additionally, loans for personal use rose to a 16-month high (5.2%; Jun: 4.4%), likely for emergency expenses.

- By sector: propelled by a steady increase in credit growth for household sector (4.3%; Jun: 3.5%) and finance, insurance and business activities (7.1%; Jun: 5.3%), reflecting promising signs of economic recovery.

- MoM: moderated to 0.3% (Jun: 0.6%), despite a new record low for weighted average lending rate of commercial banks (3.70%; Jun: 3.89%).

● Deposit growth inched up to a 11-month high (4.5%; Jun: 4.4%)

- Weighed by improved growth in demand deposits (16.3%; Jun: 14.8%), saving deposits (22.6%; Jun: 21.0%) and repurchase agreement (27.2%; Jun: 8.0%) partly attributable to the bullish stock market activity in the past few months

● 2020 loan growth forecast maintained at 1.0%-2.0% (2019: 3.9%) on COVID-19 aftermath uncertainties

- At this point, it is still unclear whether the current loan growth is sustainable due to fears of a protracted unemployment trend and business bankruptcies post-COVID-19. In addition, wariness over COVID-19 uncertainty and the extension of Recovery Movement Control Order to Dec 31st could put the brakes on credit growth and economic recovery.

- However, we believe there is still ample room for another round of overnight policy rate (OPR) cut if need be to support the economy. Nevertheless, we see a higher probability that BNM would keep the OPR unchanged at the next Monetary Policy Committee (MPC) meeting (Sep 10).

Source: Kenanga Research - 1 Sept 2020