The Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) at 3.00% in its first meeting of the year, as expected by house and all 24 Bloomberg survey respondents.
Policy statement: The MPC reiterated its stance as "supportive of the economy and is consistent with the current assessment of inflation and growth prospects."
Growth: The MPC expects the domestic economy to sustain growth in 2025, following a 2024 performance in line with expectations. Growth will be driven by resilient domestic expenditure, backed by household spending and increased investment activity, which should also boost exports. However, the growth outlook is still susceptible to downside risks from potential slowdown in major trading partners and weaker-than-expected commodity production.
Inflation: Headline and core inflation averaged 1.8% YoY in 2024, below BNM's initial forecast of 2.0% - 3.5%. The MPC has yet to announce its 2025 inflation target, which will be released in the BNM Annual Report 2024. We expect it to align with the MoF's 2.0% - 3.5% projection. The MPC highlighted that "upside risks to inflation would depend on the extent of spillover effects of domestic policy measures, as well as global commodity prices and financial market developments." This aligns with our expectation, as we forecast inflation to average 2.7% in 2025, considering the impact of subsidy rationalisation in 2H24.
Ringgit: BNM expects the Ringgit to be supported by narrowing interest rate differentials, favourable economic prospects, domestic reforms, and initiatives to encourage capital flows. However, it acknowledged that financial market volatility, driven by global policy uncertainties, could influence performance.
OPR outlook: policy rate likely to remain at 3.00% through 2025, barring unexpected developments
Reason: The current policy rate supports growth while keeping inflation in check. Although most global central banks are leaning toward easing - except for the Bank of Japan - BNM's rate decisions remains focused on domestic factors. The MPC emphasised its vigilance, stating, "The MPC remains vigilant to ongoing developments to inform the assessment on the domestic inflation and growth outlook."
Risks: Inflation risks are tilted to the upside due to the impact of domestic policy measures in the 2H25, which could push rates higher. Conversely, downside risks to GDP growth stem from increasing global uncertainties, particularly due to policy shifts as Trump returns to the White House, and the possibility for China's economic recovery to disappoint.
GDP forecast: Against this backdrop, we believe keeping the current monetary policy stance is essential to sustain domestic growth and support the Madani government's reform agenda. As such, we maintain our 2025 GDP growth forecast at 4.8%, slightly lower from an estimated 5.0% in 2024 (versus DOSM Advance estimate: 5.1%). This moderation reflects the normalisation of economic activity and a high base effect from last year.
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