• The Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) steady at 3.00% during its fifth meeting of this year, in line with the unanimous forecast from all 22 respondents in Bloomberg’s consensus survey. This marks the eight consecutive meeting with no change in the OPR, following a surprise hike in May 2023.

• Policy statement: No change to its statement, the MPC reinstated “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 as reflected by the latest indicators, backed by resilient domestic spending and higher exports. Overall, its growth outlook remained neutral, citing "the growth outlook is subject to downside risks from lower-than-expected external demand, and commodity production”, while it sees upside risks from "greater spillover from the tech upcycle, more robust tourism activity, and faster implementation of investment projects."
  
  − Inflation: The MPC noted that the impact of diesel price adjustment on broader prices has been contained and both headline and core inflation are expected to stay within earlier projected ranges, unlikely to surpass 3.0%. This aligns with our revised 2024 inflation target of 2.0% (2023: 2.5%) down from a previous estimate of 2.2%, consistent with BNM’s target range of 2.0% - 3.5%. However, upside risk to inflation outlook remains, mainly driven by potential domestic policy measures.
  
  − Ringgit: The MPC said the ringgit’s recovery was due to the expectations of lower interest rates in major economies and a strong domestic economy. It also believes that "Malaysia's positive economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage flows" will continue to support the ringgit.

• OPR outlook: current policy rate likely to remain unchanged until 2025, barring unforeseen circumstances
  
  − We maintain our outlook that BNM will keep the OPR steady at 3.00% for the rest of the year and into 2025, evenas global central banks leaning towards policy easing. The current rate remains slightly accommodative, supporting domestic economic expansion while keeping inflation in check.
  
  − Unlike many advanced economies facing high inflation and aggressive rate hikes, Malaysia’s inflation remains stable, supported by government efforts to curb price pressures. This stability is reflected in our lower inflation forecast for the year, driven by adequate supply, improved productivity, and initiatives like cash transfers, and targeted diesel subsidies, which have provided relief to vulnerable groups. Meanwhile, globally, the growth outlook remains uncertain. While the US economy has performed better-than-expected, signs of slowing are emerging, and China’s recovery remain weak. Rising geopolitical tensions and renewed trade frictions between China and Western countries also threaten growth prospects.
  
  − Against this backdrop, we believe maintaining the current monetary policy stance is vital to sustaining domestic growth while supporting the reform agenda under the Madani government. As such, we maintain our 2024 GDP growth forecast at 5.0% (2023: 3.6%), with a slight moderation to 4.8% expected in 2025.

Source: Kenanga Research - 6 Sep 2024