The Decision

• In the last Monetary Policy Committee (MPC), Bank Negara Malaysia (BNM) chose to keep its Overnight Policy Rate (OPR) steady at 3.00%. This decision aligned with our predictions and was widely expected.

• By retaining the OPR at its current level, the monetary policy stance remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects. The MPC remains vigilant to ongoing developments to inform the assessment of the outlook of domestic inflation and growth. The MPC will ensure that the monetary policy stance remains conducive to sustainable economic growth amid price stability.

• Domestic Development:
  o The advance GDP estimate points to improved economic activity in the third quarter.
  o Growth in 2024 will be driven mainly by resilient domestic expenditure, with some support emanating from the expected recovery in E&E exports.
  o Continued employment and wage growth remain supportive of household spending. Tourist arrivals and spending are expected to improve further.
  o Investment activity would be supported by the continued progress of multi-year infrastructure projects and the implementation of catalytic initiatives under the national master plans.
  o Measures under Budget 2024 will also provide additional impetus to economic activity. The growth outlook remains subject to downside risks stemming from weaker-than-expected external demand and larger and protracted declines in commodity production.
  o Meanwhile, upside risks to growth mainly emanate from stronger-than-expected tourism activity, a stronger recovery from the E&E downcycle, and faster implementation of existing and new projects.

• Global Development:
  o The global economy continues to expand, driven by domestic demand amid solid labour market conditions. Some signs of recovery are emerging in the electrical and electronics (E&E) sector, but global trade remains soft partly due to the shift in spending from goods to services and ongoing trade restrictions. 
  o Global growth remains weighed down by persistently elevated inflation and higher interest rates, with several major economies experiencing slowing growth momentum. There are early signs of improvement in China’s growth, though its property market remained weak.
  o Global headline inflation edged up partly due to higher commodity prices, while core inflation continued to moderate.
  o For most central banks, the monetary policy stance is likely to remain tight. The growth outlook remains subject to downside risks, mainly from higher-than-anticipated inflation outturns, an escalation of geopolitical tensions, and a sharp tightening in financial market conditions.
• Price Development:
  o As anticipated, both headline and core inflation have eased, primarily due to reduced cost pressures. In the third quarter, the averages for headline and core inflation stood at 2.0% and 2.5%, respectively.
  o Nevertheless, we foresee the potential for inflation to rebound in the final quarter, possibly exceeding 2% again. Several factors could underpin this, including the diminishing impact of the base effect, rising commodity prices, particularly Brent Crude Oil, the continued weakening of the Malaysian Ringgit, and the ripple effect from subsidy rationalization (e.g., chicken prices and imported rice).
  o Looking ahead to 2024, inflation is expected to hover around the current levels, with our base case projection at 3.1%. However, the inflation outlook remains highly contingent on changes in domestic policies related to subsidies and price controls, as well as global commodity prices and developments in the financial markets.
  o It's worth noting that the government's intention to review price controls and subsidies in 2024 may significantly affect the inflation outlook and demand conditions, potentially deviating from our trajectory forecast. Details of our inflation forecast will be shared in our 2024 Annual Strategy.
• Furthermore, the Federal Reserve left interest rates unchanged at the conclusion of its policy meeting in November meeting, marking the second meeting in a row where the central bank has skipped a hike in its current policy-tightening cycle. The call, which was unanimous and widely expected, keeps the target for the federal funds rate at 5.25-5.50%. The FOMC's statement didn't rule out future rate hikes.

• However, during a recent press conference, Chair Jerome Powell emphasized that officials remain unsatisfied with the progress being made in addressing inflation, and they believe that current monetary policy measures might not be sufficiently restrictive. Additionally, policymakers are closely monitoring the rise in bond yields, which is contributing to tighter financial conditions.

• As of now, we predict that BNM will likely maintain the Overnight Policy Rate (OPR) at 3.00% throughout 2024. This decision is rooted in the belief that Malaysia's economy has not fully regained its robust momentum and still faces potential downside risks. Implementing an additional interest rate hike could pose challenges to our growth prospects.

• As for the possibility of a rate cut, we do not anticipate it in the near term. Recent developments have shown that a wider interest rate gap between Malaysia and the US negatively impacts our economic/financial indicators, such as the Malaysian Ringgit. Moreover, it could deter foreigners from returning to invest in the Malaysian equity market.

• The BNM has observed that several factors are influencing the prevailing conditions in the US, such as expectations of a prolonged period of elevated interest rates and growing concerns regarding escalating geopolitical tensions. These factors have contributed to the persistent strength of the US dollar, which in turn has had an impact on major and emerging market currencies. BNM remains committed to proactively managing the risks associated with increased volatility, including providing essential liquidity to ensure the smooth operation of the domestic foreign exchange market. Moreover, Malaysian financial institutions continue to maintain robust capital and liquidity buffers, and the overall domestic financial environment remains favourable, supporting the sustained growth of credit.

• The MPC meeting also approved the schedule of the meetings for 2024, with the next MPC meeting scheduled for 23-24 January 2024 (See Figure 2).

Source: TA Research - 3 Nov 2023