• 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% in its second MPC meeting for this year. A perfect reflection of a unanimous call among all 19 respondents in the latest Bloomberg consensus survey.

• Policy statement: The MPC reiterated its statement, citing “The monetary policy stance remains supportive of the economy and is consistent with the current assessment of the inflation and growth prospects.”
  
  − Global: The committee anticipates continued expansion in 2024, albeit moderately. This is supported by domestic demand, favourable labour market conditions, regional growth, and better global trade. Nevertheless, the MPC remain cautious about China's economy, citing ongoing weakness in the property market. It also repeats the same downside risk to global growth namely geopolitical tensions, higher-than-expected inflation, and volatility in the global financial markets.
  
  − Domestic: No change in domestic growth narrative. Growth drivers mainly from the recovery in exports, resilient domestic expenditure, increased tourist arrivals and spending, sustained employment and wage growth, progress in multi-year projects, master plans initiatives, and higher realisation of investments. While the MPC did not explicitly state its growth target, to be released on March 20, we expect it to align with the MoF projection of 4.0% - 5.0%. This also aligns with our GDP growth forecast of 4.5% - 5.0% for 2024 (2023: 3.7%).
  
  − Inflation: The MPC anticipates modest inflation in 2024, noting potential risks from domestic policy changes, global commodity prices, and financial market developments that could impact the outlook for inflation and demand conditions. We share this perspective, aligning with our inflation forecast of 2.7% for 2024 (2023: 2.5%).

• OPR outlook: The monetary policy stance is expected to remain unchanged in 2024, due to potential inflation risk in the 2H24, while still supporting growth expansion
  
  − Although there are concerns about the impact of the government’s subsidy rationalisation plan and the increased in the rate of Services & Sales Tax (SST) to 8.0% from 6.0% impacting inflation, we believe this effect will be relatively limited. This view is reflected in our inflation forecast of 2.7% for 2024. This would still yield a positive real interest rate of approximately 0.3%, assuming the OPR remains unchanged at 3.00% for the rest of the year.
  
  − Against this backdrop, we maintain our view that BNM is likely to keep its OPR unchanged in 2024. This neutral stance allows BNM to support economic growth while monitoring any potential risks. Nevertheless, BNM may want to remain vigilant to changing economic conditions, especially escalating geopolitical tensions, which may necessitate a reassessment of this stance.

Source: Kenanga Research - 8 Mar 2024