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

• Current OPR level still accommodative amidst moderating economic growth

• Maintain our 2018 GDP growth projection at 4.8% (2017: +5.9%)

Highlights

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

BNM indicated that the global economy continues expanding albeit at a moderating pace, mainly due to healthy labour market conditions and strong support from policy implementations in the advanced economies, as well as sustained domestic demand in Asia.

Domestically, BNM foresees economic growth to be sustained by positive private sector growth, driven by growth in private consumption and investment. However, lower public sector spending will likely dampened growth while the government focuses paring down its financial commitments.

Meanwhile, exports will continue to provide support in boosting economic growth in the external sector, but at more moderate pace compared to the previous year due to escalating trade tensions weighing on global trade volume.

On inflation, BNM expects it to trend lower in 2018. However, price pressures will likely pick up going into 2019 due to rising commodity prices as well as impact of consumption tax policy. On the other hand, the underlying inflation is expected to remain steady due to muted demand-pull pressures.

Our comments

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

In 1H18, the economy expanded 5.0% (2017: +5.9%), while exports momentum is likely to remain resilient in upcoming quarters. We forecast 3Q18 GDP growth to expand at 4.6%, with full year 2018 GDP growth to come in at 4.8% – similar to the recent government’s’ forecast released during Budget 2019.

In September, inflation remains low at 0.3% y-o-y after expanding lower at 0.2% and 0.9% in the preceding 2 months. On the other hand, core inflation picked up slightly at 0.3% y-oy compared to a contraction in the previous month. The inflationary trend appears to be under control, giving room for BNM to maintain an accommodative monetary policy stance.

The Ringgit has depreciated 3.3% YTD, to RM4.15 per USD as of 8 November 2018. The depreciation of Ringgit which began since the General Elections in May18 has been persistent until now and therefore, any changes now may trigger further volatility in Ringgit.

Overall, we believe that BNM will keep the OPR steady at 3.25% at least until mid-2019, as there is no rush to implement any rate changes in the meantime. However, there may be a possible review for a rate cut of 25bps to spur economic activity if GDP growth falls below 4% in upcoming quarters.

We reiterate our 2018 GDP forecast at 4.8% (2017: +5.9%) and inflation forecast at 1.1% (2017: +3.7%).

Source: Alliance Research - 8 Nov 2018