• In line with prevailing expectations, Bank Negara Malaysia (BNM) maintained the overnight policy rate (OPR) at 3.00%. This decision mirrors the consensus from the previous meeting, where all respondents surveyed by Bloomberg projected no change in the OPR.

• Policy statement: The Monetary Policy Committee (MPC) reiterated its policy stance and highlighted concerns of a higher-forlonger interest rate environment in the US and heightened geopolitical risk
  
  − Global: MPC sees green shoots of recovery, especially in the electrical and electronics (E&E) sector as well as China. But it reiterates soft global trade trends arising from a shift in spending from goods to services, higher-than-anticipated inflation outturns, rising geopolitical tensions and sharp tightening in the financial markets as hurdles to the global growth outlook.
  
  − Domestic: Despite the global challenges, the MPC remains optimistic about the overall trajectory of the economy. Apart from domestic demand, the MPC sees support from the expected stronger recovery in E&E exports, continued improvement in tourist arrivals, and ongoing progress of multi-year infrastructure projects. In short, the MPC expects growth momentum to persist into 2024. This is in line with the MoF’s GDP growth projection of 4.0% to 5.0% for 2024 (KIBB: 4.9%) from a forecast of 4.0% in 2023 (KIBB: 3.5% - 4.0%).
  
  − Inflation: No change to its outlook on inflation, and it expects inflation to remain modest in 2024. However, it stated that “risks to the inflation outlook remain highly subject to changes to domestic policy on subsidies and price controls, as well as global commodity prices and financial market developments.” A caveat to the outlook for inflation and demand conditions would be “Government’s intention to review price controls and subsidies in 2024,” it adds.

• OPR outlook: Downside bias to GDP growth to influence monetary policy direction
  
  − We anticipate that escalating geopolitical tensions, which contribute to mounting macroeconomic uncertainty, could overshadow any emerging signs of recovery in global trade and growth. This would reinforce BNM’s current policy stance, albeit for longer. Moreover, scant justification exists for a policy shift, given the belief that it has concluded its rate normalisation cycle, a decision underscored by the emerging indications of subsiding inflationary pressures. This would rein in any hawkish tendencies and grants BNM the latitude to focus on fortifying financial stability while navigating external uncertainties.
  
  − Considering our anticipation that the Federal Reserve and other principal central banks will maintain their current policy rates for an extended period in response to persistently high inflation, we surmise that BNM has a strong rationale to hold the OPR steady at 3.00% well into 2024 and possibly beyond, barring any unforeseen jolts.

Source: Kenanga Research - 3 Nov 2023