Malaysia: Bank Negara turned marginally dovish


The central bank could be taking a “wait-and-see” approach in the interim as policy direction will be data driven in the coming months.
Irvin Seah, Duncan Tan14 Mar 2019
  • We have lowered our full year inflation forecast to 1.7% as inflation continues to slip
  • Rhetoric from the central bank has turned marginally dovish amid concerns regarding growth outlook
  • Weaker growth outlook and rising inflation complicates monetary policy stance
  • Policy direction will be data driven in the coming months
  • A pre-emptive move by the central bank should not be discounted if economic data disappoints
Photo credit: AFP Photo


Inflation has eased faster than expected. Latest Jan19 CPI inflation surprised on the downside with a decline of 0.7% YoY in the month. This is down from +0.2% in Dec18 and is also the first negative reading since Dec09. The rapid decline in inflation has significant implications on our full year inflation forecast, as well as Malaysia’s monetary policy direction.

The steep fall in inflation was largely driven by two factors – a slew of fiscal policies aimed at lowering the cost of living, including the zero rating of the Goods and Services Tax (GST), and a correction in oil prices in late 2018.



We expect inflation to bottom in 1H19 and to start rising from 2Q19 onwards. The increase will be even more pronouncedly in 2H19. Oil prices are likely to average about USD 70-75/bbl and the base effect from the fiscal policy changes will also dissipate by 2H19. Taking all into account, we now expect full year inflation to register 1.7% in 2019. More importantly, inflation is likely to stay range-bound between 2.5-3.0% in the second half. This means that if the Overnight Policy Rate (OPR) remains at 3.25%, real policy rate will still be less than 1% and overall monetary policy is still deemed to be accommodative.

In the most recent policy March meeting, Bank Negara (Malaysia) continues to keep the OPR at 3.25%. However, rhetoric has turned marginally dovish with more focus on the downside risks on growth resulting from the unresolved trade tensions, heightened uncertainties in the global and domestic environment, and prolonged weakness in the commodity-related sectors. Additionally, the inclusion of sentence “Recognising that there are downside risks in the economic and financial environment…”, on top of the usual concluding line that “the MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation”, does suggest policymakers’ rising worry on the growth outlook.

Indeed, overall GDP growth for 2019 is expected to register 4.5% in our opinion, well short of the government’s forecast of 4.9%. This could perhaps prompt policymakers to consider a slightly more accommodative monetary policy stance.

Market has responded to the slight change in language in the policy statement and the emerging concern on growth outlook. Onshore swap markets have re-priced from no change to one cut this year (to occur at July or September meetings, small chance of May meeting). There are currently no hike/cut priced for 2020 and 2021.



Bank Negara last cut policy rate by 25bps in Jul16. This is after two consecutive quarters of growth that averaged just 4%, and with inflation falling from 3.5% to 1.0% in that same period. The situation is slightly different this time. Growth in the first half of the year could disappoint but inflation will likely pick up sharply in 2H19. Monetary policy could be in the fix if that pans out.

We reckon that the central bank could be taking a “wait-and-see” approach. Notwithstanding the marginally dovish rhetoric, policy direction will be very much data driven in the coming months. While we are maintaining the view of a stable monetary policy with the OPR at 3.25% for the rest of the year, a pre-emptive move, e.g., a 25bps cut, by the central bank should not be discounted if economic data disappoints.

MGS/MGII: Possible bottoming of foreign ownership

Year-to-date, led largely by easing fiscal concerns and compressing of credit risk premium, Malaysian Government Securities (MGS) have rallied strongly (c1.7% in price for the 10Y tenor).

We note that 5Y credit default swap spreads on Malaysian bonds have fallen to historically low levels. Therefore, any further rally in MGS would likely have to be driven by lower global yields, pricing of more BNM cuts or the sustained return of foreign inflows.



Net foreign buying of MGS and MGII (Islamic bonds) in February 2019 was particularly large at MYR5.7bn. We think this could mark a bottoming of foreign ownership considering that Malaysian bonds are attractive assets to hold in the current carry environment and foreign asset managers are likely still quite underweight (from 2018’s outflows).


To read the full report, click here to Download the PDF.

Irvin Seah

Executive Director
irvinseah@dbs.com

Duncan Tan

FX and Rates Strategist - Asean
duncantan@dbs.com
 

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.