The Decision

• Bank Negara Malaysia (BNM) left its key interest rate unchanged at 3.00% in its second Monetary Policy Committee (MPC) meeting on 7 March 2024, citing the monetary policy stance remains supportive of the economy and is consistent with the current assessment of the inflation and growth prospects. The decision matched ours and consensus forecast.

• At the current OPR level, the MPC remains vigilant to ongoing developments to inform the assessment on the outlook of domestic inflation and growth and will ensure that the monetary policy stance remains conducive to sustainable economic growth amid price stability.

Domestic Development:

• Anticipated economic growth in 2024 is poised for enhancement, underpinned by the resurgence in exports and the persistence of domestic expenditure. Export growth has rebounded into positive territory in January, marking 8.7% increase to RM122.43bn after a contraction period since March last year. This positive trend is set to persist, fortified by the strength of global trade. Our GDP growth projection for the year stands at 4.7%, aligning closely with the Ministry of Finance's target range of 4%-5%. The central bank is set to unveil their comprehensive projections with the release of the Annual Report 2023.
   
• Tourist arrivals and spending are poised to rise further. Tourism Malaysia are confident of achieving the 27.3mn foreign tourist arrivals this year due to several supporting factors, including the government’s charter flight matching grant incentive, Visa Liberalisation programme and increasing tourism promotion activities abroad. In 2023, Malaysia welcomed 20.14mn tourists, exceeding the initially projected target of 19.1mn arrivals. Notably, these visitors contributed to the nation's economy, collectively spending a substantial RM71.31bn during their stay.
   
• While continued employment and wage growth remain supportive of household spending, investment activity would also be supported by the ongoing progress of multi-year projects in both the private and public sectors, the implementation of catalytic initiatives under the national master plans, as well as the higher realisation of investments.
   
• However, the growth outlook is subject to downside risks stemming from weaker-than-expected external demand and larger declines in commodity production. Meanwhile, upside risks to growth mainly emanate from greater spillover from the tech upcycle, more robust tourism activity and faster implementation of existing and new projects.

Global Development:

• The global economy continues to expand albeit moderately, supported by domestic demand amid improvement in trade activity. Favourable labour market conditions in some countries continue to support consumption activity.
   
• Looking ahead, growth in regional economies is expected to improve, while China’s growth would likely remain modest given continued weakness in the property market. Premier Li Qiang stated that China will target economic growth of about 5% this year (2022: 5.2%) as it works to transform its development model, curb industrial overcapacity, defuse property sector risks and cut wasteful spending by local governments
   
• Attention is also turning towards the imminent release of the April edition of the IMF World Economic Outlook (WEO). In the preceding estimation (WEO January 2024), the IMF indicated that the forecast for 2024–25 is below the historical (2000–19) average of 3.8%, with elevated central bank policy rates to fight inflation, a withdrawal of fiscal support amid high debt weighing on economic activity, and low underlying productivity growth. Global growth is projected at 3.1% in 2024 and 3.2% in 2025. The upcoming report is awaited with anticipation, as it will provide valuable insights into the evolving trajectory of the global economy.
   
• BNM cited that the global monetary policy stance is likely to remain tight in the near term, as inflation remains above average. The growth outlook remains subject to downside risks, mainly from an escalation of geopolitical tensions, higher-than-anticipated inflation outturns, and volatility in global financial markets.

Price Development:

• Headline and core inflation stood at 1.5% and 1.8% respectively in January 2024, trending in line with expectations.
   
• Inflation in 2024 is expected to remain moderate (TA Forecast: 2.9%;), broadly reflecting stable demand conditions and contained cost pressures. The MOF’s Economic Outlook 2004 report projected that the inflation rate is expected to be at 2.1% to 3.6% this year.
   
• However, this outlook continues to be highly dependent on the implementation of domestic policy on subsidies and price controls, as well as global commodity prices and financial market developments. Trend wise, the inflation rate is expected to rise marginally underpinned by forthcoming rollout of subsidy rationalization.

• The imminent FOMC Meeting, slated for 19-20 March 2024, has heightened speculation surrounding the Federal Reserve's stance on the federal-funds rate. The pivotal question revolves around the timing of a potential rate cut. According to the CME FedWatch Tool, probability of an increase in March is only 5.0% versus 27.5% in May, 74.8% June and 91.2% in July

• This shift in probability can be attributed to comments made by the US Federal Reserve Chair, Jerome Powell. Powell emphasised the central bank's anticipation of reducing its benchmark interest rate later in the year, yet cautioned that continued progress on inflation "is not assured." Highlighting the substantial easing of inflation since its peak in 2022, Powell stressed the necessity for policymakers to have "greater confidence" in the sustained decline of inflation before considering a rate cut.
   
• Our current projection indicates a likelihood that the BNM will maintain the OPR at 3.00% throughout 2024. This forecast is grounded in the assessment that Malaysia's economy is still in the process of regaining robust momentum and faces potential downside risks.
   
• As of yesterday, the Malaysian Ringgit concluded trading at RM4.7052/USD, reflecting a notable improvement from its recent low of RM4.7987/USD on February 20, 2024. Despite this positive shift, it remains on a downward trajectory year-to-date, experiencing a decline of 3.14%. The Government and Bank Negara Malaysia are taking coordinated actions to encourage repatriation and conversion of foreign investment income by Government-Linked Companies (GLCs) and Government-Linked Investment Companies (GLICs). These actions are contributing to greater inflows, lending support to a firmer ringgit. Over the medium term, ongoing structural reforms will provide more enduring support to the ringgit. Additionally, the concurrent easing of monetary policy in the US, complemented by a stabilisation in China's economy toward the year's conclusion, is expected to provide an added impetus to the strengthening performance of our currency.
   
• The next MPC meeting is scheduled for 8 - 9 May 2024. It is also important to note that on 20 March 2024, BNM will release its latest macroeconomic projections, including the Annual Report 2023, Economic & Monetary Review 2023, and Financial Stability Review 2nd Half 2023. These reports will provide valuable insight into the central bank's economic outlook and possible indications for future monetary policy decisions.

Source: TA Research - 8 Mar 2024