By Opus Asset Management Sdn Bhd
- Overnight Policy Rate (OPR) raised by 25 basis points (bps) to 2.50%; data-dependent stance on rate hikes.
In line with previous messaging on the positive growth outlook and subsequent bright performance of 2Q22 Gross Domestic Product (GDP) growth (Actual: +8.9% YoY; Consensus: +7.0% YoY), Bank Negara Malaysia’s (BNM) moved to hike the OPR by 25bps. Interestingly, BNM messaging has also included its data-dependent stance on rate hikes going forward as “the MPC is not on any pre-set course”. Looking ahead for the rest of 2022, our house view incorporates another 25bps rate hike in November such that the OPR reaches 2.75% as we anticipate sustained economic growth.
- MPC statement highlights strong US Dollar and Emerging Market (EM) impact.
We note that BNM has made reference to the continued strengthening of the US dollar against EM currencies. Despite a noticeable depreciation, we derive comfort from the outperformance of the Ringgit versus other Emerging Market currencies (e.g. Korean Won, Chinese Yuan etc.) against the US Dollar, which should be the case going forward as Malaysia’s commodity exports should provide support for the Ringgit.
- BNM expects Malaysia’s inflation outlook to peak in 3Q22 before declining.
While Malaysia’s headline Consumer Price Index (CPI) remains on an uptrend (Jul’22: +4.4% YoY; Jun’22: +3.4% YoY), BNM projects for the CPI increase to moderate after 3Q22 due to dissipating base effects and an expected decline for global commodity prices. In our view, the increasing likelihood of commodity prices moderating can be tied to the rising recession risk for developed economies, whereby demand destruction (lesser new orders and reduced consumption) can help temper commodity prices.
- Malaysian GDP growth remains sustainable.
BNM remains bullish on the state of Malaysia’s economic recovery, highlighting robust domestic demand (in contrast to weakening external factors) and continued improvement in employment indicators. We note that low base effects (e.g. the negative 3Q21 GDP print) and robust local consumption aided by Employees Provident Fund (EPF) withdrawals should maintain Malaysia’s positive GDP growth trend for the rest of 2022.
- Malaysian Government Securities (MGS) markets remained in a holding pattern post-BNM decision.
MGS yields were slightly lower, with the longer end 10-Year MGS (MGS10Y) trading slightly below 4.10% as of the time of writing. In our opinion, BNM’s rate hike decision was in line with fixed income market expectations, which had previously priced in another 2-3 rate hikes before September’s Monetary Policy Committee (MPC) meeting. Taking into consideration demand-driven price pressures and a resilient Malaysian economic recovery despite the ongoing global economic slowdown, our house view maintains another 25bps rate hike for 2022, bringing the OPR up to 2.75%.
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