“Our baseline is for BNM to keep its policy rate unchanged at 3.00% at its 6 July meeting after surprising with a 25 basis points hike at its 3 May meeting. Our view is premised on weaker incoming activity data since 3 May pointing to slower growth momentum in quarter two 2023 alongside easing inflationary pressures,” said OCBC Treasury Research (OCBC) in a recent report.
On the domestic front, April wholesale and retail sales growth slowed to 3.2% year-on-year and 12.9% from 5.5% and 19.5% in quarter one. On the external front, export and import growth slowed to -9.4% year-on-year and -7.1% in April/May from 2.8% and 3.7% in quarter one.
That said, there were some pockets of strength with capital goods imports and consumer goods imports holding up. Taken together, growth momentum is slowing and the incoming data is broadly consistent with OCBC’s forecast for gross domestic product growth to slow to 4.9% year-on-year in quarter two from 5.6% in quarter one.
The pockets of domestic demand resilience have manifested in stickier core inflationary pressures compared with headline inflation. Core inflation eased to a lesser extent compared to headline inflation but the direction implies that inflationary pressures are easing.
Indeed, headline inflation eased enough in May to allow real rates to turn mildly positive for the month. Importantly, the broadness of consumer price index inflation has reduced in recent months, albeit still elevated compared to pre-Covid levels.
The main unknown for the inflation picture is from the government’s plan for targeted subsidy rationalisation. The government is adding a surcharge of 10 sen per kilowatt hour in the electricity tariff for households exceeding 1,500 kilowatt hour 1 starting in July 2023 while reducing electricity surcharge rates for non-residential consumers including commercial and industrial users.
This will mitigate some of the inflationary impact and we estimate headline inflation will be pushed by 0.1 point for the rest of 2023. Easing food and fuel prices, however, will continue to provide an offset.
“As such, we maintain our forecast 2023 headline consumer price index forecast of 2.9%, within Bank Negara Malaysia’s 2.8-3.8% forecast range. The bigger impact to inflation may be from targeted fuel subsidies which are still under discussion,” said OCBC.
Putting it all together, OCBC continues to expect Bank Negara Malaysia to remain on hold at its 6 July meeting. The research house assigned a 70% probability to this outcome and acknowledged that there are some factors that weigh in favour of an incremental hike.
“That said, the risk of additional tightening will rise more noticeably, in our view, if inflationary pressures build from the implementation of targeted fuel subsidies,” said OCBC.
