• Bank Negara kept OPR unchanged at 3.25% and SRR at 3.5%

• Current OPR level is accommodative to ensure steady economic growth

• Maintain our 2018 GDP growth projection at 5.4% (2017: +5.9%)

Highlights

At the March Monetary Policy Committee (MPC) meeting, Bank Negara Malaysia (BNM) maintained Overnight Policy Rate (OPR) at 3.25% and the Statutory Reserve Requirement (SRR) Ratio at 3.5%.

BNM reiterates that the global economy maintained its strengthening pace, showing strong growth momentum. This can be seen from rising wages and policy support occurring in advanced economies, as well as sustained domestic and external demand in Asia.

Domestically, BNM foresees economy growth to be sustained by positive global growth outlook and spillovers from the external sector. 4Q17 growth performance reflected strong domestic demand, underpinned by favourable income and labour market conditions, as well as new and on-going infrastructure projects taking place in 2018.

On inflation, BNM expects it to averaged lower in 2018, as the strengthening of Ringgit will continue to mitigate import costs. However, the trajectory of the headline inflation will depend on future global oil prices which are highly uncertain.

Meanwhile, core inflation is projected to moderate with the support of better labour productivity and stronger investments.

Our comments

BNM’s decision to maintain OPR at 3.25% was in line with Bloomberg consensus and our expectations.

In 2017, the economy expanded 5.9% (2016: +4.2%), while exports momentum is likely to normalise in upcoming quarters, we forecast GDP growth to still be strong at 5.4% in 2018 – at the higher end of government’s’ forecast range of 5.0% -5.5%.

During January, inflation eased to 2.7% after surging up to 3.5% in the preceding month. On the other hand, core inflation remains unchanged at 2.2% compared to previous month. The inflationary trend appears to be under control, give room for BNM to maintain an accommodative monetary policy stance.

The Ringgit has strengthened 3.0% YTD, to an average of RM3.91 per USD in February. The strengthening of Ringgit which begins in Nov17 has been persistent until now, preventing pump prices from surging higher as well as decreasing prices of other imported goods in Ringgit term. Therefore, a sudden change on the OPR could cause disruption in the exchange rate direction.

Meanwhile, foreign investors continue to buy back MGS, amounting to RM4.2bn in January (2H17: RM14.8bn). We foresee foreign buying back of MGS to continue, given that around RM26.0bn of MGS is set to mature in 1H18.

Overall, we believe that BNM will keep OPR steady at 3.25% throughout the year. We reiterate our 2018 GDP forecast at 5.4% (2017: +5.9%) and inflation forecast at 3.0% - 3.5% (2016: +3.7%).

Source: Alliance Research - 7 Mar 2018