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

• Trigger point for rate cut by BNM if GDP growth falls below 5.0%

• Maintain our 2018 GDP growth projection at 5.6%, with a potential downside bias due to escalating trade war

Highlights

At the July 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 stated that the global economy continues to strengthen, even though there were some disparities in some economies. Rising income and policy changes in advanced economies will spearhead growth, as well as sustained domestic and external demand in Asia. Meanwhile, there are downside risks to global trade with trade tensions deepening among major economies to affect trade activities, investments and consumption.

Domestically, BNM expects economic growth to be sustained by domestic and external demand, as private consumption will be supported by improvement in wage and employment amid boost in consumer spending during the tax holiday period. At the same time, greater clarity in domestic policies in the coming months will further strengthen growth prospects.

On inflation, BNM expects it to average lower than earlier projections, due to the impact of recent policy changes affecting domestic cost factors e.g. removal of GST and reinstatement of fuel subsidy. Furthermore, headline inflation will likely remain low in 1H19, before expanding upwards as the policy effect fades. Meanwhile, core inflation is projected to remain stable amid steady domestic demand.

Our comments

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

In 1Q18, the economy expanded 5.4% (2017: +5.9%), while exports momentum moderated. We forecast GDP growth to still be strong at 5.6% in 2018 – at the higher end of government’s’ forecast range of 5.0% -5.5%.

Concurrently, the Ringgit has strengthened 0.5% year-to-date, to an average of RM4.00 per USD in June. For now, Ringgit remains resilient as the second best performing currency in the region. However, fear over escalating trade war may drive the local currency to weaken to RM4.10 per USD in the near-term. Nonetheless, we expect the Ringgit to close at RM4.00 per USD by year-end, and RM3.80 per USD by June next year.

At the moment, trade tensions between US and China have yet to exert a significant impact on Malaysia’s economy. However, if tit-for-tat tariffs between the two nations prolong and Malaysia’s GDP growth to fall below 5.0% in upcoming quarters, it will likely act as a trigger point for BNM to implement a possible rate cut of 25 bps.

Overall, we believe that BNM will keep OPR steady at 3.25% throughout the year. We reiterate our 2018 GDP forecast at 5.6% (2017: +5.9%) with potential downside bias due to escalating trade war. We also maintain our 2018 inflation forecast at 2.0% -2.5% (2017: +3.7%).

Source: Alliance Research - 11 Jul 2018