•  BNM keeps OPR unchanged at 3.00% and SRR at 3.5%

•  Expect BNM to hold rates steady until end-2019

•  Maintain our 2019 GDP growth projection at 4.5% (2018: +4.7%)

Highlights

At the July Monetary Policy Committee (MPC) meeting, Bank Negara Malaysia (BNM) maintained the Overnight Policy Rate (OPR) at 3.00% and the Statutory Reserve Requirement (SRR) Ratio at 3.5%.

BNM indicated that the global economy grew modestly, with steady labour conditions supporting growth in advanced economies while domestic demand remained the main driver of Asia’s growth. However, the central bank also stated that downside risks associated with trade tensions and heightened policy uncertainties will continue to weigh down on nearterm growth outlook.

Domestically, BNM expects its 2019 GDP projection to remain between 4.3% and 4.8%. Growth will likely be sustained by positive private sector expansion and supported by healthy labour market conditions within key sectors. But lower contributions from the external sectors are expected amid the softening of global growth. Headwinds arising from US-China trade tensions and high volatility in commodity-related sectors will continue to dampen Malaysia’s economic growth momentum.

On inflation, BNM expects the Consumer Price Index (CPI) to normalise and remain broadly stable in 2019 as the impact of SST’s reintroduction dissipates. While price pressures will likely be dependent on the volatility of commodity prices, the underlying inflation is expected to be steady due to muted demand-pull pressures.

Our comments

BNM’s decision to maintain the OPR at 3.00% is in line with Bloomberg consensus and our expectations.

In 1Q19, the economy expanded 4.5% (4Q18: +4.7%), while exports momentum is likely to recover in the second half of the year. We forecast 2Q19 GDP growth at 4.3%-4.5% while maintaining moderate full-year 2019 GDP expansion at 4.5%, mainly due to lower government spending and subdued exports performance amidst slowing growth of manufacturing and mining sectors.

Inflation-wise, YTD-May CPI contracted by 0.1% y-o-y due to the unexpected deflationary period in the first two months of 2019. On the other hand, core inflation (ex. Food and Transport) remained steady at 0.5% y-o-y during the same period. Inflationary pressures still appear weak at the moment, but are expected to trend higher in the second half of the year.

YTD 8 July 2019, the ringgit has depreciated back to its initial level of RM4.14 per USD as at the start of the year. At present, BNM is unlikely to make any changes towards the OPR to prevent triggering further volatility in the ringgit as it is currently comfortable with the current exchange rate level.

Overall, we believe that BNM will keep the OPR steady at 3.00% for now until end-2019, amid a lower inflation environment and in anticipation of moderating economic growth.

We maintain our 2019 GDP growth forecast at 4.5% (2018: +4.7%) and inflation forecast at 0.8% y-o-y (2018: +1.0%).

Source: Alliance Research - 9 Jul 2019