The Decision

• In its fourth Monetary Policy Committee (MPC) meeting on 11 July 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 remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects.

• Bank Negara sounded optimistic about the economic growth developments both domestically and globally.
   
  • Domestically, the latest indicators point towards sustained strength in economic activity in the 2Q24, driven by resilient domestic expenditure and better export performance. For instance, the personal spending proxy, the Distributive Trade Index recorded an encouraging growth in the April-May period with an average of 5.1% vs. 3.7% recorded in 1Q24. In addition, exports are expected to be further lifted by the global tech upcycle given Malaysia’s position in the semiconductor supply chain, as well as continued strength in non-electrical and electronics goods. Total exports rose by 4.5% in the April-May period, which was higher than the 2.2% growth recorded in 1Q24. Meanwhile, continued employment and wage growth, as well as policy measures, will continue to support household spending. The labour market continued its positive momentum, showing a consistent increase in employment nationwide. In May 2024, employment grew by 1.8% YoY with the jobless rate standing at 3.0% in May 2024. 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 approved investments. The growth outlook is, however, subject to downside risks from weaker-thanexpected external demand and larger declines in commodity production.
     
  • Meanwhile, the global economy continues to expand amid resilient labour markets and a continued recovery in global trade. Looking ahead, global growth is expected to be sustained, as headwinds from tight monetary policy and reduced fiscal support will be cushioned by positive labour market conditions and moderating inflation. The growth outlook  remains subject to downside risks, primarily stemming from further escalation of geopolitical tensions, higher-than-anticipated inflation outcomes, and volatility in global financial markets. These factors could undermine economic stability, disrupt supply chains, and negatively impact investor confidence, making it crucial for policymakers to remain vigilant and adaptable in their strategies.
     
  • All eyes will be on the latest update from the International Monetary Fund (IMF) as they release their latest World Economic Outlook on 16 July 2024. This highly anticipated report will provide critical insights into global economic trends, growth projections, and potential risks. Economists, policymakers, and investors worldwide are keenly awaiting this update, which could significantly influence financial markets and economic strategies.
     
• Touching on prices, both headline and core inflation averaged 1.8% in the first five months of the year. As expected, inflation will trend higher in the second half of 2024, amid the recent rationalisation of diesel subsidies. Nevertheless, the increase in inflation will remain manageable given the mitigation measures to minimise the cost impact on businesses. Going forward, the upside risk to inflation would be dependent on the extent of spillover effects of further domestic policy measures on subsidies and price controls to broader price trends, as well as global commodity prices and financial market developments. For the year as a whole, headline and core inflation are expected to average within the earlier projected ranges of 2.0% - 3.5% and 2.0% - 3.0% respectively (TA: 3.3%).

• All eyes are now on the RON95 subsidy rationalization, which we believe will be implemented later this year. In our opinion, the RON95 subsidy rationalization is likely to be executed through a gradual and measured approach to minimize potential shocks to the economy and consumers. This careful implementation aims to balance fiscal sustainability with the need to mitigate the impact on household budgets and overall economic stability. According to the central bank, inflation pressure in the second half of the year is likely to trend higher. However, the shock may be manageable due to the government's efforts in tackling the potential price hikes. These measures aim to mitigate the impact on consumers and maintain economic stability.

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.

• We believe that the ringgit has been influenced by encouraging domestic performance. As of yesterday, the Malaysian Ringgit concluded trading at RM4.6875/USD, reflecting an improvement from the previous day's closing rate of RM4.6997/USD. The ringgit has also been trending upwards since its recent low of RM4.7957/USD on April 16, 2024. Year-to-date, the ringgit has only declined by 1.99%, which is an improvement compared to the 2.62% decline observed in the first half of 2024. BNM is increasing engagement efforts and monitoring the conversion of export proceeds into ringgit by exporting companies in an effort to strengthen the value of the local currency. These measures are expected to support the ringgit's stability and boost confidence among investors.

• The next MPC meeting is scheduled for 4 - 5 September 2024.

Source: TA Research - 12 Jul 2024