Malaysia: July MPC meeting: Staying the course

HIGHLIGHTS

July MPC meeting: Staying the course

• The Overnight Policy Rate (OPR) was held at 3.25% for the third meeting in a row, policy continuity was signalled under new BNM governor Datuk Nor Shamsiah.
• The MPC statement was broadly neutral with a dovish tilt in a nod to domestic policy uncertainty and external risks from global trade tensions and rising global yields.
• The anticipated inflation slippage over the short term, resulting in widening real policy rate spreads with the US, has given BNM the policy space to remain accommodative.
• We maintain an end-2018 OPR forecast of 3.25%, implying no further hikes this year.

OPR left unchanged at 3.25%
The Monetary Policy Committee (MPC), chaired by new Bank Negara Malaysia (BNM) Governor Datuk Nor Shamsiah Mohd Yunus, extended the pause in Overnight Policy Rate (OPR), which remained at 3.25% for the third straight meeting. The decision was well anticipated by us and all analysts surveyed by Bloomberg.

Policy continuity under new Governor
It was a homecoming for the new Governor who will serve a term of five years until 30 Jun 2023 as she was previously the BNM Deputy Governor responsible for areas including banking, insurance, and Takaful supervision, financial intelligence and enforcement until her departure in November 2016. She signalled no dramatic departures from the monetary policy stance pursued by predecessor Tan Sri Muhammad Ibrahim.

Slight caution on growth outlook from external risks
BNM maintained its assessment of Malaysia’s economic outlook for 2018, following the raft of policy reforms introduced by the new Pakatan Harapan government. BNM expects Malaysia to remain on a steady growth path (CIMB: +5.2% yoy in 2018F), which will be further supported when the government provides greater certainty in domestic policy in the coming months. The MPC statement reflected the central bank’s view that economic and financial conditions remain supportive in the post-election environment. Nonetheless, BNM cautioned against downside external risks, particularly the escalating trade tensions and ongoing monetary policy normalisation.

Reduction in inflation risks…
BNM expects headline inflation to trend below its earlier forecast range of 2.0% to 3.0% in 2018 (CIMB: +1.3%), following the reduction in the Goods and Service Tax (GST) rate and fixing of RON95 and diesel fuel prices. The central bank expects headline inflation to turn negative in some months and remain low in 1H19 as a result of the aforementioned policy measures, and normalise once the transitory effects lapse. In May, headline inflation ticked higher to 1.8% yoy while core inflation was steady at 1.5% yoy.

… creates policy space to keep the OPR on hold
Regionally, interest rate cycles are turning positive to keep up with the US Federal Reserve’s policy rate hikes. Despite narrowing nominal policy rate spreads, the slowdown in Malaysia’s short-term inflation outlook has increased the real spread between the OPR and US Fed Funds rate, allowing BNM to keep policy rates accommodative until next year, in our view. While OPR cuts are an option, it would mean swimming against the tide of regional central banks and potential spillovers to the currency, unless the GDP growth and inflation outlooks deteriorate more sharply. We expect BNM to tread with caution and reiterate our end-2018 OPR forecast of 3.25%, implying no further hikes this year, with the next OPR hike anticipated in 2H19F.

Originally published by CIMB Research and Economics on 11 July 2018.