Bank Negara Malaysia (BNM) in its final Monetary Policy Committee (MPC) meeting this year maintained the Overnight Policy Rate (OPR) at 3.00%. BNM sees signs of economic improvement in China, as well as domestic support derived from ‘expected recovery in E&E exports’ and remains confident on the ringgit’s performance owing to country’s ‘strong capital and liquidity buffers.’
In this light, CGSCIMB maintains their 2024F OPR at 3.0%.
Final rate pause for the year
Bank Negara Malaysia in its final MPC meeting this year maintained the Overnight Policy Rate (OPR) at 3.00%, making this the third pause in a row, in line with our forecast. The decision also was widely expected as the consensus in a Bloomberg poll had expected status quo.
Resilient domestic expenditure to anchor economic growth
Comparing the current MPC statement against that issued on 7 Sep 2023, the tone remains neutral. On the global side, there were two key changes in the statement: 1) BNM highlighted that global headline inflation ‘edged up partly due to higher commodity prices’ and, 2) BNM is now more optimistic on China’s GDP growth 3Q23 although it remains cautious of the country’s weak property market CGSCIMB cited.
As for the domestic economy, BNM’s advance GDP estimate for 2023F provides reassurance of improvement in the nation’s economic activity, with support derived from ‘expected recovery in E&E (electrical & electronics) exports’. BNM is also confident that the measures announced under Budget 2024 will provide ‘additional impetus to economic activity’.
Most importantly, BNM added that it expects Malaysia’s Consumer Price Index (CPI) to ‘remain modest’ in 2024F though it noted that the government’s ‘review on price controls and subsidies’ will impact ‘demand conditions’.
CGSCIMB thinks this could indicate that BNM is comfortable on the country’s economic progress but remain cautious on Malaysia’s 2024F economic outlook.
Subsidy rationalisation poses risk to 2024F CPI
Despite BNM’s modest outlook on 2024F inflation, we suspect there is high potential for Malaysia’s inflation to trend higher owing to the implementation of targeted subsidy. The government has already started withdrawing chicken subsidy and price controls effective 1 Nov 2023, with more measures anticipated ahead, including electricity tariff revision (possibly in Dec 2023) and adjustments to subsidised fuel prices (possibly in 2Q24).
More importantly, the MPC statement cited possible impact to ‘demand conditions’ in 2024, which could imply BNM anticipates weaker consumption (if income support is not provided intandem), or weaker demand-pull inflation (despite higher cost-push pressures) in 2024F.
Either would indicate a dovish policy strategy ahead, in our view. Hence, CGSCIMB maintains their CPI projection at 2.8% for 2023F and 2.5% for 2024F pending further updates on the government’s subsidy rationalisation measures.
Weakening in Ringgit may not dampen economic growth prospects
The MPC statement also added a paragraph on the ringgit’s performance, addressing the market over a still weakening in ringgit going forward. According to the statement: ‘…these developments are not expected to derail Malaysia’s growth prospects.
Bank Negara Malaysia will continue to manage risks of heightened volatility, including to provide liquidity, to ensure the orderly functioning of the domestic foreign exchange market.’
CGSCIMB thinks BNM remained confident on the ringgit’s performance owing to country’s ‘strong capital and liquidity buffers’ which likely did not impact its decision on the OPR despite considering the aggressive monetary policy tightening in the US (the US Fed maintained
its policy rate last night).
CGCIMB maintains their view that the OPR will be kept at 3.0% in 2024F.
Keeping OPR at 3.00%
Maybank Investment Bank (Maybank IB) said today (Nov 3) that Bank Negara Malaysia (BNM) kept Overnight Policy Rate (OPR) at 3.00% after its 1-2 Nov 2023 Monetary Policy Committee (MPC) meeting i.e. third consecutive MPC meet of “OPR pause”.
Unchanged OPR amid balanced growth and inflation risks; other measures to deal with Ringgit
The latest Monetary Policy Statement (MPS) indicates BNM views the upside and downside risks to both growth and inflation as balanced, hence the decision to maintain the OPR at 3.00%.
While keeping the assessment of continued global growth that is however weighed down by sticky inflation and higher interest rates as well as downside risks such as geopolitical risks and tighter financial conditions, MPS also highlighted early signs of E&E sector recovery and improvement in China economy despite its weak property market.
These crosscurrents of global/external headwinds and tailwinds caused domestic economy clocking low single-digit growth of +2.9% YoY in 2Q 2023 which improved to +3.3% YoY in 3Q 2023 (advanced estimate). Going forward, BNM views the balance of risks facing Malaysia’s economy to be balanced between the upsides from resilient domestic demand (mainly as employment and wage growth underpins consumer spending); recoveries in E&E and tourism industries; progress in multi-year existing and new infrastructure projects and implementation of catalytic initiatives and projects under the recently announced national master plans (e.g. MADANI Economy; National Energy Transition Roadmap; National Industrial Master Plan 2030) which will support investment activities vs the downside risks to external demand and commodity output.
Meanwhile, inflation is decelerating (Fig 3) i.e. sub-3% YoY monthly headline inflation rate since May 2023 has gone sub-2% YoY i.e. +1.9% YoY in Sep 2023 (Aug: 2023: +2.0% YoY; 9M2023: +2.8% YoY; 2022: +3.3%). Core inflation has dipped below +3% YoY since but is “stickier” i.e. higher than headline inflation and year-to-date vs last year (Sep 2023: +2.5% YoY; Aug 2023: +2.5% YoY; 9M2023: +3.3% YoY; 2022: +3.0%).
BNM’s MPS expect inflation rate to remain modest in 2024, but this outlook is highly subjected to changes in domestic policy on subsidies and price controls – as per Budget 2024 plan to implement targeted subsidy rationalisation – as well as global commodity prices and financial market developments.
The upsides and downsides to inflation are reflected by the official 2024 inflation rate’s wide forecast range of 2.1%-3.6%.
MPS also included a paragraph on Ringgit, highlighting the “higher-for longer” expectation on US interest rate and escalation of geopolitical tensions that contribute to US Dollar strength.
BNM said it will “manage risks of heightened volatility, including to provide liquidity, to ensure the orderly functioning of the domestic foreign exchange market”.
Maybnk IB interprets this as indicating OPR is not the “tool” to address current Ringgit weakness, and other measures will be applied.
Aside from FX market interventions via uses of external reserves and FX swaps to mitigate excessive movements and volatility of Ringgit, they also take note of the gradual rise in 3M KLIBOR of late, which have occurred previously – albeit more sharply – in 1H July 2023 when Ringgit was also under pressure vs US Dollar.
OPR to remain at 3.00% in 2024
Maybank IB expects the OPR to remain at 3.00% in 2024 given our current forecasts of moderate pick up in GDP growth to +4.4% (2023E: +4.0%) and inflation rate to +3.0% (2023E: +2.6%), plus US Fed on “hold-for longer” stance from Dec 2023 until into 3Q 2024 after another round of “pause” that kept the fed funds rate target at 5.25%-5.50% at 31 Oct – 1 Nov 2023 FOMC meeting.
