Bank Negara Malaysia (BNM) continues to maintain the overnight policy rate (OPR) at 3.00%, in line with expectations. All 21 respondents surveyed by Bloomberg news called for no change on the OPR.
The Monetary Policy Committee (MPC) reaffirmed that its monetary policy stance remains supportive of the economy, but omit the phrase “slightly accommodative,” Kenanga Research said today (Sept 8).
Although the global economy continues to expand, driven by resilient domestic demand and favourable labour market conditions, the MPC sees global growth “weighed down by persistently elevated core inflation and higher interest rates.” Apart from repeating its concern about China’s growth recovery, the MPC freshly mentioned the growing weakness in global trade due to “rotation of spending from goods and services, and the ongoing electrical and electronics downcycle.”
Meanwhile, BNM’s outlook on the global economy remained unchanged and it continues to emphasised that it is subjected to downside risks: slower growth momentum in major economies, unexpectedly higher inflation outturns, escalating geopolitical tensions, and a sharp tightening in financial market conditions.
Domestic economy
Following the slower-than expected 2Q23 GDP growth, BNM sees growth “will continue to be driven by resilient domestic expenditure amid the challenging external environment.”
With healthy employment and wage growth supportive of household spending, improving tourist arrivals and spending, continued progress of multi-year infrastructure projects, and the implementation of catalytic initiatives under the recently announced New Industrial Master Plan 2030, growth momentum is expected to continue going into 2024.
Inflation
BNM continues to expect inflation, both headline and core, to ease “amid the more moderate cost conditions” in the 2H23. Domestic policy on subsidies and price controls, global commodity prices and financial market developments, as well as the degree of persistence in core inflation are factors that could determine the inflation outlook, it adds.
BNM Overnight Policy Rate (OPR) outlook
Status quo for longer amid slower growth outlook and uncertainty − Heightened macro uncertainty and slower global growth are largely the main reasons for BNM to continue its “no change” stance for a longer period. Furthermore, there is limited reasons for BNM to change its policy stance as we believe it has completed its rate normalisation cycle following signs that inflationary pressures are easing.
This would keep the hawkish bias in check and allow BNM to focus on financial stability and dealing with external risks. − Also by dropping the phrase “slightly accommodative” after “At the current OPR level,” it somewhat removes any expectation of further tightening by BNM and also signals that the current monetary cycle has reached its peak and the next move would likely be a rate cut. However, it would not be anytime soon, Kenanga Research said.
Along with the expectation that the Fed and major central banks will maintain their current policy rate for longer in view of the stubbornly high inflation, Kenanga research expects this would give BNM ample reason to maintain the OPR at 3.00% well into 2024 and beyond, barring any unforeseen shocks.
Meanwhile, CGSCIMB said BNM maintained the OPR at 3.00% for the second consecutive MPC meeting with ‘Slightly accommodative’ removed from statement.
Comparing the current Monetary Policy Committee (MPC) statement against that issued on 6 Jul 2023, the tone remains neutral. On the global side, there were 2 key changes in the statement: 1) BNM saw the weakening of trade stemming from ‘rotation of spending from goods to services, and the ongoing electrical and electronics (E&E) downcycle’ and, 2) on China, BNM seemed to become less optimistic amid its slower-than expected growth.
On the domestic economy, the ‘implementation of catalytic initiatives under the recently announced master plans’ is an additional factor for growth, although BNM cautioned that ‘larger and protracted declines in commodity prices’ as well as weaker than expected external demand could further impact domestic growth outlook.
On a positive note, BNM said a ‘stronger recovery’ from the E&E downcycle and faster implementation of ‘existing and new’ projects and improvements in tourism activity are major upsides to domestic economic growth.
Most importantly, BNM removed the phrase ‘slightly accommodative’ in the statement but added that the monetary policy stance is ‘consistent with current assessment of inflation’. We think this could indicate that BNM is satisfied on the progress of the rate impact in achieving its inflation targets, while acknowledging the slowdown in economic growth.
Maintain OPR at 3.00% at end-2023F
CGSCIMB maintains their expectation of no OPR hike at the MPC meeting in Nov, keeping the end2023F rate at 3.00%. They think global conditions over the next quarter or two will likely remain weak as the US maintains its elevated federal funds rate in order to favour dampening inflation expectations over slowing economic growth.
Further, China is still dealing with considerable growth challenges owing to weak business and consumer confidence amid uncertain economic and political conditions, ongoing problems in the real estate industry, as well as limited fiscal space for a massive and effective support.
Following this, the onus of Malaysia’s economic growth will lie further on the domestic economy, in which the catalysts remain limited to the tourism sector and strong labour market. For exporters, the impact of a weak ringgit might be limited as global demand would probably recover later in the year.
OPR unchanged throughout 2024F
CGSCIMB thinks BNM may face greater challenges come 2024, especially on the domestic side.
Even if the external environment gradually recovers, adjustments to subsidy and fiscal spending will likely mar domestic developments. The government has indicated its plan to reduce subsidies starting with diesel, before likely expanding to RON95, adding pressure to inflation.
Further, the rollout of possible new taxes by the government, in its drive to rein in high debt levels could soften consumption. On balance, however, the firm thinks OPR will likely remain at 3.0% throughout 2024F.
BNM has had the luxury of not needing to raise OPR aggressively this year given the large and extensive government price controls and subsidies, hence it may not necessarily have to cut interest rates next year, unlike other advanced economies.
