● As widely anticipated, the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) has decided to maintain the Overnight Policy Rate (OPR) at 3.00%. A perfect reflection of a unanimous call among all 24 respondents in the latest Bloomberg consensus survey.

● Policy statement: The MPC reiterated its policy stance, but the tone appears to be slightly optimistic compared to previously

- Global: While global trade conditions pose challenges, the MPC sees growth in 2024 to be supported by factors such as exports, domestic expenditure, employment, and wage growth. Meanwhile, though China's economy is showing signs of improvement, the MPC remains cautious as its recovery is still modest.

- Domestic: While it acknowledged growthoutlook remains subject to downside risksdue to weak global demand and declines incommodity output, the MPC re-emphasise that upside risks to growth would likely come “from greater spillover from the tech upcycle, stronger-than-expected tourism activity and faster implementation of existing and new projects.” This would arguably support our GDP growth forecast of 4.9% for 2024 (MoF projection: 4.0% - 5.0%) from an estimated 3.8% in 2023.

- Inflation: No change to the inflation narrative where MPC expect it to remain modest, with potential risks from domestic policy changes and global commodity prices apart from being subjected to changes to domestic policy on subsidies and price controls, as well as fluctuations of global commodity prices and the financial market. Again, MPC continued to expect inflation in 2024 “to remain modest,” adding that it broadly reflects “stable cost and demand conditions.” This is still within our inflation outlook which is projected at 2.7% (2023: 2.5%).

● OPR outlook: Downside bias to GDP growth to influence monetary policy direction

- Notably absent from the statement is a specific mention on the Fed’s possible pivot to interest rate cuts this year. However, the statement did mention that the global monetary policy stance is likely to remain tight in the near term, but the tightening cycle has peaked for most central banks. This indicates the potential impact of global monetary policy trends on the Malaysian economy as inflation could remain sticky. While there are inflationary risks present domestically, our projected average inflation rate of 2.7% in 2024 would still yield a positive real interest rate of approximately 0.3%, assuming the OPR remains steady at 3.00%.

- Considering these factors, it appears there is limited necessity and justification for BNM to alter the OPR in 2024. Hence, we would reiterate that this would rein in any hawkish tendencies and gives BNM the leeway to focus onfortifying financial stability while navigating external  uncertainties. Additionally, it is crucial for BNM to remain vigilant to changing economic conditions, especially escalating geopolitical tensions, which could warrant a reassessment of this stance.

Source: Kenanga Research - 26 Jan 2024