Julia Goh [email protected] Global Economics & Markets Research Email: [email protected] URL: www.uob.com.sg/research

Monday, 15 May 2017

Flash Notes

Malaysia: BNM Keeps OPR On Hold With Neutral Bias 

Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) at 3.00%. The decision came widely expected. It marks the fifth meeting that OPR is kept on hold after 25bps cut in July last year. The next monetary policy meeting will be on 12-13 July 2017.



Looking up. BNM sounded optimism on the global outlook as well as domestic growth momentum. BNM mentioned that GDP growth is expected to strengthen in the first quarter of 2017, and to be sustained for the rest of the year. Release of 1Q 2017 GDP and current account is on 19 May.

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Headline inflation is expected to moderate in 2H 2017. Cost-push inflation is not expected to have a significant impact on the broader price trends given stable domestic demand.

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BNM signals neutral bias. BNM signaled a neutral monetary stance. Despite mounting expectations for Fed to raise rates in the near future, we do not expect BNM to follow in tandem. We think growth and inflation risks are manageable while Ringgit has stabilised. On balance, we expect BNM to keep the OPR unchanged this year.

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USD/MYR hovers at 4.34 and a break above 4.3560 would indicate that the USD has moved into a neutral consolidation phase, likely between 4.3250 and 4.3700.

Global economy en-route for growth. BNM sounded that global economy continues to expand with industrial activity and global trade having picked up. BNM expects the global economy to improve further with a revival in investments in advanced economies and sustained domestic activity alongside stronger exports in the emerging economies. BNM continued to caution on threats from protectionism, geopolitical developments, and commodity price volatility which could reignite financial volatility. Malaysia’s growth expected to strengthen further. BNM is optimistic that growth momentum should strengthen in 1Q 2017 and to be sustained for the rest of the year. Growth will be driven by domestic demand and continued wage and employment growth, as well as implementation of investment projects. Exports are expected to contribute positively to overall growth. We expect real GDP growth of 5.0% in 1Q 2017. We concur with BNM that growth momentum should tick higher. We have tuned up our real GDP estimates to 5.0% y/y for 1Q 2017 (vs. 4.5% in 4Q 2016) following higher growth in manufacturing output (1Q17: 5.7%; 4Q16: 4.9%), services activity (1Q17: 6.2%; 4Q16: 5.9%), construction work done (1Q17: 9.7%; 4Q16: 8.1%), and crude palm oil production (1Q17: 17.9%; 4Q16: -7.2%) which should translate to a turnaround in agriculture production from -2.4% in 4Q 2016. This should help offset slower mining output (1Q17: 1.2%; 4Q16: 4.7%). We maintain our full year GDP growth outlook of 4.5% for 2017 and 4.7% for 2018. Transient spike in inflation. BNM said the increase in inflation (to 4.3% in 1Q 2017) reflects mainly the pass-through impact of higher global oil prices and temporary supply disruptions that led to higher food prices. BNM expects the higher headline inflation to moderate in the second half of the year though the trend will be dependent on global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, is expected to increase only modestly. We expect headline inflation to have peaked in March and average 3.6% this year.

Flash Notes 15 May 2017

Ringgit stabilises. BNM reaffirms that the banking system liquidity remains sufficient. Financial institutions continue to operate with strong capital and liquidity buffers and financing of private sector activity grows consistently with the pace of the economy. As such, BNM kept the statutory reserve requirement (SRR) unchanged at 3.5%. Malaysia’s foreign reserves edged up to US$96.1bn as at end-April. The level of reserves is sufficient to cover 7.9 months of retained imports and 1.1 times of short-term external debt. Foreigners turned net buyers of domestic bonds for the first time in April (+MYR6.8bn in April) following five months of selling since November 2016 (-MYR62.7bn between Nov 16 to Mar 17) signaling a reversal in sentiment following recent BNM liberalisation of bond and FX measures and more supportive external market conditions.

Schedule of BNM and US Federal Reserve monetary policy meetings in 2017

BNM

FOMC

1 18-19 January 2 1-2 March

31 January - 1 February

3 11-12 May 4 5 12-13 July

2-3 May

6 6-7 September 7 8-9 November

19-20 September*

8

12-13 December*

-

14-15 March* 13-14 June* 25-26 July 31 October - 1 November

Source: BNM, Federal Reserve * Meeting associated with a Summary of Economic Projections and a press conference by the Fed Chair.

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