The Decision

• In its third Monetary Policy Committee (MPC) meeting on 9 May 2024, Bank Negara Malaysia (BNM) opted to keep its key interest rate unchanged at 3.00%. The decision, in line with both ours and consensus expectations, was justified by BNM citing that the current monetary policy stance continues to provide support to the economy. This stance aligns with the prevailing assessment of inflation and growth prospects.

Domestic Development:

• The Malaysian economy has shown promising signs of growth in the first quarter of 2024, propelled by robust domestic spending and a notable upswing in external demand. According to recent data from the Department of Statistics, Malaysia's economy is projected to have expanded by 3.9% YoY in 1Q24, demonstrating a steady improvement compared to the previous quarter's 3.0% YoY growth. The finalised GDP data is scheduled for release on 17 May 2024.
   
• The central bank has noted that the resurgence in exports is anticipated to gain momentum, buoyed by the global tech upswing and sustained demand for non-electrical and electronics goods. Additionally, there's optimism surrounding tourist arrivals and expenditure, reflecting a burgeoning trend in Malaysian tourism. Recent data indicates a surge in tourism activity, with 5.8mn tourists visiting in the first quarter of 2024. We attribute this growth partly to the 30-day visa exemption for Chinese and Indian tourists, which has contributed to increased Arrivals in Malaysia.
   
• The sustained growth in employment and wages continues to bolster household spending. In March 2024, the value of distributive trade, serving as a proxy for personal expenditure, reached RM145.7bn, marking a 5.0% YoY increase. This positive trend was observed across all sub-sectors, with Retail Trade showing a growth of 7.1%, Wholesale Trade at 4.0%, and Motor Vehicles at 3.2%. Additionally, for a month-on-month comparison, sales values saw a notable increase of 3.3%.
   
• Meantime, investment activity would be supported by the ongoing progress of multiyear 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 approved investments.
   
• The growth outlook is, however, subject to downside risks from weaker-than-expected external demand, and larger declines in commodity production.

Global Development:

• The global economy is on a growth trajectory, buoyed by resilient labour markets in select countries and ongoing recovery in global trade. Looking ahead, this momentum is anticipated to persist, despite challenges posed by tight monetary policies and reduced fiscal support. Positive labour market conditions and moderating inflation are poised to mitigate these headwinds, contributing to Sustained Global Growth.
   
• Global trade is expected to strengthen further as the global tech upcycle gains momentum. While global headline and core inflation continued to edge downwards in recent months, the pace for disinflation has slowed in some advanced economies.
   
• This increases the prospect of interest rates to remain high for longer, particularly in the US. The growth outlook remains subject to downside risks, mainly from further escalation of geopolitical tensions, higher-than-anticipated inflation outturns, and volatility in global financial markets.

Price Development:

• Headline and core inflation averaged 1.7% and 1.8% in the first quarter of 2024 respectively. Looking forward, BNM mentioned that inflation in 2024 is expected to remain moderate, broadly reflecting stable demand conditions and contained cost pressures.
   
• Furthermore, the outlook for the remainder of the year hinges on the execution of domestic policies concerning subsidies and price controls, alongside fluctuations in global commodity prices and developments in financial markets. Accounting for the potential effects of subsidy rationalisation, headline and core inflation are forecasted to range between 2.0% to 3.5% and 2.0% to 3.0%, respectively for the year (TA forecast: 2.9%).

Our Thoughts

• 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.
   
• The current valuation of the Malaysian Ringgit does not accurately mirror Malaysia's economic fundamentals and growth prospects. External factors, such as evolving expectations regarding the monetary policies of major economies and persistent geopolitical tensions, have induced heightened volatility in capital flows and exchange rates across the region, including the ringgit. As of yesterday, the Malaysian Ringgit concluded trading at RM4.7395/USD, reflecting an improvement from its previous day's closing rate of RM4.7415/USD. Despite this positive momentum, the ringgit has seen a year-to-date decline of 3.07%, indicating a persistent downward trajectory.
   
• While domestic factors may not be significantly boosting the ringgit, its value is largely influenced by external demand, particularly the strength of the US Dollar. Forecasts from the CME's FedWatch Tool indicate expectations of lower interest rates in the US this year. Currently, there's only an 8.7% probability of an interest rate cut in June, but this increases to 29.2% in July and 48.5% in September. This suggests that the widened interest rate spread between Malaysia and the US will persist, keeping the ringgit weak. During the upcoming June meeting, FOMC policymakers will provide updated projections for year-end interest rates, offering further insight. As of 20 March 2024, most FOMC policymakers anticipated two or three rate cuts in 2024.
   
• The coordinated initiatives by the Government and BNM with the Government-Linked Companies (GLCs) and Government-Linked Investment Companies (GLICs), and corporate engagements have gained further traction, cushioning the pressure on the ringgit. BNM will continue to manage risks arising from heightened financial market volatility. Over the medium term, domestic structural reforms will provide more enduring support to the ringgit.

Source: TA Research - 10 May 2024