Bank Negara Malaysia (BNM) kept its overnight policy rate (OPR) steady at 3.00% for the third straight meeting on Nov 2, amid contained Malaysian inflation and an uncertain global environment facing Malaysia’s open economy. We maintain our expectations for BNM to stay on a prolonged pause, with policymakers assessing the stance as remaining ‘supportive of the economy’, and the ringgit’s weakness vs the US dollar ‘not expected to derail Malaysia's growth prospects.’
Malaysia’s inflation, both headline and core, has been moderating over the course of 2023, and BNM is expecting continued modest inflation in 2024. This suggests little need to tighten policy to contain upward price pressures. Yet, we see upside inflation risks. They come from the uncertainty to rising global prices from evolving developments surrounding the Middle East conflict, the shift to targeted subsidies in 2024, and a weaker currency. BNM would, therefore, also not be too quick to ease policy prematurely.
While still acknowledging downside growth risks for the global and Malaysian economies, BNM appears to be slightly positive in Nov vs Sep, in our view. On the global economy, BNM was cautious on global trade, elevated inflation, and higher interest rates, but mentioned some signs of emerging recovery in the electrical & electronics (E&E) sector, and early signs of improvement in China’s growth. Regarding Malaysia, BNM pointed to 3Q23 advance GDP growth uptick. While flagging downside global risks, policymakers expect 2024 growth to be driven mainly by resilient domestic demand, and some support from recovering E&E exports. Our 2024 growth forecast of 4.8% is in line with the government’s 4.0-5.0% projection.
BNM also added a paragraph on the MYR weakness in its statement, but said that the depreciation vs the US dollar was a situation also faced by other major and emerging market currencies, with a mention on the growth spill-over rather than inflation. It seems to us that there is little impetus to raise interest rates as an avenue for currency stability and mitigate the MYR’s drop. Instead, BNM said that it would ensure the orderly functioning of the domestic currency market through managing risks of heightened volatility by providing liquidity.
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