• Overnight Policy Rate (OPR) raised to 3.25%

• Expect no more OPR hike for the rest of 2018

• 2018 GDP growth forecast at 5.4% (2017e: +5.8%)

Highlights

At the January Monetary Policy Committee (MPC) meeting, Bank Negara Malaysia (BNM) raised Overnight Policy Rate (OPR) by 25bps, bringing it up from 3.0% to 3.25%, but kept Statutory Reserve Requirement (SRR) Ratio unchanged at 3.5%.

In their assessment, BNM asserted that the global economy has strengthened further, with growth becoming more integrated across countries and expected to grow at a faster pace in 2018. Global trade improved well above expectations. Currently, downside risks to global growth appeared to be more balanced, as current phase of global economic expansion continues.

Internally, BNM sees a sustainable growth in the Malaysian economy, supported by positive spillovers from the external sector. Domestic demand continues to spearhead growth, backed by improving incomes, labour market conditions and steady capital investments of new and on-going infrastructure projects.

On inflation, BNM indicated that the headline inflation is expected to normalise in 2018 reflecting the weakening effect of global cost factors. Core inflation is expected to remain manageable.

Our comments

BNM’s decision to hike OPR to 3.25% was within Bloomberg consensus, first time since July 2014.

Generally, an OPR hike will directly increase the Base Financing Rate (BFR) by as much as 25bps and deposit rates by as much as around 20bps. For the banking industry, the rate hike means higher margin from variable rate products.

We believe the decision was largely due to high inflation rates (2017: +3.7%), which had been eroding deposit rates (averaging 3.1% as at Nov 2017). Real interest rates have been negative over the last 12 months.

The decision by BNM is considered a tough one, partly due to high inflation rates. With a strong growth momentum, low interest rates are feared to result in financial imbalances.

Positive factor includes the strengthening of Ringgit in the short-term. As of 24 January 2018, the Ringgit has rallied to RM3.92 per USD, registering a 2.5% gain since the start of the year (2 Jan18: RM4.02 per USD).

Lastly, foreign investors were buying-back MGS amounting to RM14.8bn in 2H17, after selling-off in the first half of the year (1H17: -RM18.9bn). Moving forward, foreign buying of MGS will likely continue, given that around RM26.0bn of MGS is set to mature in 1H18.

In the meantime, the rise in OPR will likely improve Malaysia’s attractiveness amongst foreign investors, leading to stronger capital inflows and further appreciation of Ringgit.

Overall, we do not see this to be the start of a monetary tightening process. In other words, we do not expect any more hikes for the next 12 months, at least.

Source: Alliance Research - 25 Jan 2018