● Bank Negara Malaysia (BNM) has kept the overnight policy rate (OPR) unchanged at 3.00%, in line with expectations. We are one of the 16 respondents surveyed by Bloomberg news, out of a total of 17, who expected no change (status quo). Only one respondent called for a 25 basis points (bps) rate hike.

● Policy statement: Monetary Policy Committee (MPC) maintains its cautious stance on the growth outlook for the remainder of the year amid worry about China’s growth recovery

- Global: While the MPC continue to see the global economy being supported by resilient domestic demand and favourable labour market conditions, it expressed concern about the sustainability of China’s growth recovery and as core inflation “remains higher than historical averages.” Meanwhile, BNM expects most central banks to maintain a tight monetary policy stance. However, it reiterates that the growth outlook is prone to downside risks, including slower growth momentum in major economies, unexpectedly higher inflation levels, escalating geopolitical tensions, and a significant tightening of financial market conditions.

- Domestic economy: BNM admitted that growth would be slower post-1Q23 on weaker exports due to softer global demand. Nevertheless, it opines that a “resilient domestic demand” would support the economy going forward. Favourable labour market conditions, a steady increase in inbound tourists, and the continued progress of major infrastructure projects are expected to boost investment activities. However, we realised that the MPC had omitted the phrase “risks to the domestic growth outlook are relatively balanced” used in previous statements, indicating a tilt towards higher risk to growth for the remaining part of this year.

- Inflation: It projects inflation, both headline and core, to slowly moderate for the remainder of the year. The persistence of core inflation, domestic policy changes regarding subsidies and price controls, and fluctuations in global commodity prices and financial markets would likely influence the inflation outlook.

● BNM OPR outlook: A stronger signal that it has completed its policy normalisation cycle

- Although core inflation remained elevated at 3.5% in May (5-year average: 1.5%), reflecting a relatively strong demand, the BNM is still expected to maintain the OPR at 3.00% for the rest of the year. Heightened macro uncertainty and slower global growth are largely the main reasons. Our belief that the central bank has completed its policy normalisation cycle is further supported by our expectations of a continued downward trend in both headline and, eventually core prices. It is worth noting that headline inflation decreased to below 3.0% in May for the first time in 12 months, resulting in a positive real interest rate for the first time in 26 months.

- However, it is important to acknowledge the existence of risks and uncertainties that could impact the central bank’s decisions. This is the main reason the MPC would remain vigilant to cost factors, including those arising from financial market developments, that could affect the inflation outlook.

Source: Kenanga Research - 7 Jul 2023