Malaysia: Steady policy rate as risk dynamics shift

BNM’s stance could shift towards supporting softer growth
Group Research, Chua Han Teng08 Sep 2023
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    Bank Negara Malaysia (BNM) maintained its overnight policy rate (OPR) at 3.00% for the second straight meeting on September 7. We expect it to maintain status quo during 2023’s final meeting in November. Risk dynamics have shifted away from tempering high inflation towards supporting softer growth. The removal of the phrase ‘limited risks of future financial imbalances’ implies lesser concern over this issue, supporting the case of a continued rate hold. 

    BNM’s assessment of continued headline and core inflation moderation in 2H23 suggests little impetus for policymakers to hike rates to dampen price pressures. Headline inflation has cooled to the long-term average of 2.0% as of July, and was less than half of Aug 2022’s peak of 4.7% YoY. Core inflation remains higher than headline, but it has also been decelerating. At 2.8% YoY in July, this marked the lowest core rate since May 2022. We trim our 2023 average headline inflation forecast to 2.7% (vs 3.0% previously). This accounts for the government’s pledge to maintain subsidies through 2H23 that would partly contain adverse commodity price shocks, favourable base effects, and average headline inflation, which already eased to 3.0% for Jan-July 2023. 

    Moreover, Malaysia’s externally oriented economy is hurt by an uncertain global economic environment. BNM sees the current policy stance as supportive of the economy, and therefore, we think it would be less inclined to tighten policy. BNM judged that its growth outlook is subject to downside risks from external factors, which were in line with our expectations. Interestingly though, in its upside risks, BNM cited ‘a stronger recovery from the E&E (electrical & electronics) downcycle’ on top of the usual factors: tourism and implementation of new and existing projects. Notwithstanding the still challenging external climate, this likely signalled that at least the regional electronics downturn has probably bottomed, and a fragile and modest recovery is on the cards.

    Chua Han Teng, CFA

    Economist - Asean

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