By Opus Asset Management Sdn Bhd
Overnight Policy Rate (OPR) unchanged at 1.75%.
In line with its South-East Asian peers, Bank Negara Malaysia (BNM) has maintained the OPR at 1.75%. Our house view maintains 1 rate hike in 2H2022, in view that Malaysia’s economic growth remains at the beginning of the recovery stage.
MPC statement reflects BNM’s accommodative policy stance, acknowledges uncertainty from geopolitical tension.
In terms of language, BNM has reiterated its policy stance that remains accommodative and data-driven, while the BNM Governor has recently spoken against the “premature withdrawal” of monetary policy support from BNM. Growth wise, BNM has framed the maintenance of the OPR against a growth outlook which has risks tilted to the downside, with special mention towards the ongoing armed conflict in Russia-Ukraine.
Core inflation approaching BNM target of 2%.
BNM expects inflation to normalize to historical levels, with January 2022 core inflation rising to +1.6% Year-on-Year (YoY). We note broad-based increases in core inflation pressures from lockdown-sensitive service sectors are balanced by the near-term moderation in consumption from Omicron, which may cap core Consumer Price Index (CPI) from rising too quickly.
Conciliatory US Federal Reserve (Fed) testimony moderates risk of aggressive near-term US rate hikes.
We derive comfort from Jerome Powell’s testimony where he voiced support for a 25bps rate hike in the upcoming March Fed meeting, a move that we view as seeking to stabilize volatile markets spooked by war fears. This will allow some breathing room for emerging markets such as Malaysia.
Minor reaction in Malaysian Government Securities (MGS); markets more focused on geopolitical tensions.
We note some buying activity in market right after the release of the MPC statement, since BNM remains accommodative. The fixed income market continues to price in roughly 3 rate hikes in Malaysia, suggesting OPR risks are more than accounted for. Furthermore, US Treasuries remain choppy as they react to geopolitical tensions and the changing Fed narrative, as compared to a stabler MGS market. We maintain our house view of 1 rate hike of 25 bps for the Malaysian OPR in 2H2022 in view of moderate inflation, ongoing concerns with geopolitical risks and its impact on the economic recovery.
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