- Overnight Policy Rate (OPR) left unchanged at 2.75%; pause to assess the lagging effects of monetary policy. Bank Negara Malaysia’s (BNM) elected to keep the OPR unchanged at 2.75%, in stark contrast to consensus of a 25bps OPR hike to 3.0%. BNM cited its intention of leaving the OPR unchanged to better assess the lagging impact of monetary policy, which is in line with comments from regional central banks.
- MPC statement highlights flagging external growth environment and lagging impact of monetary policy. We note that a pause is in line with previous BNM messaging of its data-dependent stance on rate hikes as “the MPC is not on any pre-set course”. Key differences in the latest statements include reference to “weaker-than-expected growth outturns in major economies”, which is pertinent due to Malaysia’s status as a trade-reliant economy and exporter. Lastly, BNM’s intention of a pause to assess the domestic situation is coherent with the gloomier outlook in global growth, which prompted the World Bank to slash global Gross Domestic Product (GDP) growth forecasts.
- Malaysia’s inflation still elevated despite decline from 3Q22 peaks. Malaysia’s headline Consumer Price Index (CPI) continues to moderate from its peak (Aug’22: +4.7% YoY; Nov’22: +4.0% YoY), aided by dissipating base effects and an expected decline for global commodity prices, although core inflation remained on a stubborn uptrend. However, we note that the balance between inflation and growth narratives on monetary policy has shifted slightly towards the latter, given BNM’s emphasis on weakening external growth and normalizing domestic tailwinds.
- Malaysian GDP growth normalizing amid weakening external environment. While BNM remains bullish on the state of Malaysia’s economic recovery, highlighting robust domestic demand, domestic growth will normalise as tailwinds from the low base effect and expansionary government policy fade. Malaysia’s trade-reliant economy could soon be caught in the cross-fire of global slowdowns, with both exports and imports rising less than expected in Dec’22. Moving forward, Malaysia’s 2023 forecasted trade growth of 1.3% is expected to only slightly exceed the World Trade Organisation forecast of 1% global trade growth.
- Malaysian Government Securities (MGS) markets rallied entering into 2023, driven by global dynamics. MGS yields were slightly lower, with the longer end 10-Year MGS (MGS10Y) trading at ~3.90% as at the time of writing. We note that fixed income markets entered 2023 in a bullish manner as the outlook on the US Federal Reserve’s (Fed) terminal Fed Funds Rate grew clearer, along with the Bank of Japan’s insistence on monetary easing.
- 1 more rate hike, bringing OPR to 3.00%. Taking into consideration a resilient Malaysian economic recovery amid growing fears of an ongoing global economic slowdown, we expect just one more rate hike of 25bp rate hike in the next MPC meeting, bringing the OPR to 3.00%. However, we note that the window for BNM to hike rates further is shorter now, as more visible signs of slowdown starts to emerge. Any further pause in rate hikes may see OPR remaining at 2.75% for the rest of the year.
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