• As widely expected, the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) decided to maintain the Overnight Policy Rate (OPR) at 3.00% during its fourth meeting this year. This aligns with the unanimous prediction of all 22 respondents in the latest Bloomberg consensus survey. BNM has kept the OPR unchanged for the seventh straight meeting, after a surprise hike in May 2023.

• Policy statement: The MPC reinstated its stance, citing “The monetary policy stance remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects.”
  
  − Growth: The MPC sees sustained strength in economic activity in the 2Q24, amid resilient domestic spending and better export performance. Overall, its growth outlook remained neutral, citing that "the growth outlook is subject to downside risk from weaker-than- expected external demand, and larger declines in commodity production”, while upside risks from "greater spillover from the tech upcycle, more robust tourism activity, and faster implementation of existing and new projects."
  
  − Inflation: The MPC expects a higher inflation trend in the 2H24 due to the impact of diesel subsidy rationalisation. As in the last MPC statement, it anticipates "the upside risk to inflation would be dependent on the extent of spillover effects of further domestic policy measures on subsidies and price controls to broader price trends, as well as global commodity prices and financial market developments." Nevertheless, it believes inflation will remain manageable due to the mitigation measures by the government to minimise the cost impact on businesses.
  
  − Ringgit: Remained influenced by external factors namely the monetary policy direction of major economies and ongoing geopolitical tensions. Nonetheless, the impact on the ringgit was mitigated by coordinated initiatives between the government, BNM, GLCs and GLICs. The MPC expect the local note to receive enduring support from the domestic structural reforms over the medium term.

• OPR outlook: no change, status quo likely for the rest of the year barring unforeseen circumstances
  
  − Given the neutral statement by the MPC, we maintain our outlook that BNM will keep its policy rate unchanged at 3.00% for the rest of the year and possibly until 2025. This stance aims to support domestic growth, which remains vulnerable to global uncertainties. These include China’s recovery, a potential slowdown in the advanced economies due to a higher interest rate environment, and rising geopolitical tensions, including the impact of the ongoing Red Sea crisis on global port congestion and renewed US-China tensions.
  
  − We believe maintaining the current monetary stance for an extended period will help keep inflation under control following the diesel subsidy rationalisation in June, as well as uncertainties around the implementation and impact of the targeted subsidy for RON95. Government measures such as Budi Madani and potential increases in cash transfers, if the RON95 price is floated, are expected to ease the impact of higher inflation on households.

Source: Kenanga Research - 12 Jul 2024