By Opus Asset Management Sdn Bhd
- Overnight Policy Rate (OPR) raised by 25 basis points (bps) to 2.25%. Bank Negara Malaysia’s (BNM) rate hike was expected in line with its previous statement in May, and consistent with interest rate normalisation globally. Further interest rate rises from BNM in the 2nd Half of 2022 (2H22) are certainly possible, and would be in line with our house view of another rate hike in 2H22 along with our expectation of Malaysia’s long term interest rate being at 3%.
- MPC statement emphasises positive Malaysian growth prospects, but highlights global risks. We note that BNM has framed its 25bps rate hike against the expectation that Malaysia’s growth outlook is recovering. However, BNM acknowledges the risk of spillovers into Malaysia’s economy, caused by cost pressures and external risks such as the Russia-Ukraine war.
- Unchanged inflation outlook despite May Consumer Price Index (CPI) beat as subsidies remain. BNM has maintained its headline inflation forecast within the 2.2% – 3.2% range, despite May’s +2.8% YoY CPI exceeding expectations and the uptrend in food prices. However, while Malaysia’s inflation trajectory may be on the higher end of BNM’s range, we opine that measures, such as the recent freeze in electricity tariffs and U-turn in removing the poultry price ceiling, should serve to prevent Malaysia CPI from spiking uncontrollably. The Finance Minister has also mentioned that Malaysia can afford the maintenance of subsidies for essential consumer necessities.
- Malaysian growth prospects viewed as optimistic. With Malaysian inflation relatively moderate by global standards, BNM sees factors such as firm domestic demand as tailwinds for the local economic recovery post-lockdown. In our view, Malaysia’s recovery remains supported by economic indicators, such as a lower unemployment rate and increases in wholesale & retail trade as consumer spending improved following the lifting of restrictions.
- Malaysian Government Securities (MGS) markets saw yields slip slightly post-BNM decision. MGS market participants reacted by sending yields lower, with the longer end 10-Year MGS (MGS10Y) trading slightly below 4.10% as at the time of writing. In our opinion, the fixed income market which had previously priced in interest rate normalisation in Malaysia is growing cognizant of the recession narrative overseas despite Malaysia’s ongoing economic recovery. Thus, we maintain our house view for another rate hike of 25 bps for the Malaysian OPR in 2H2022, taking into consideration BNM’s policy normalization following the strengthening Malaysian economic recovery as well as the rising risks of a looming global economic recession.
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