- Bank Negara Malaysia maintained the Overnight Policy Rate (OPR) at 3.00%. After hiking in May’23 due to “resilient domestic demand”, Bank Negara Malaysia (BNM) elected to maintain the OPR at 3.00% for the July Monetary Policy Committee (MPC) meeting. The pause was largely in line with Bloomberg consensus (17 of 18 polled called for a pause).
- MPC statement highlights the role of domestic consumption to mitigate a weaker external environment. The statement retains key themes from the previous MPC (potential deterioration in external conditions and stubborn inflation), while noting that growth will be driven by “resilient domestic demand”. BNM focus has also likely shifted towards the fragility of the external environment, which is apparent in the statement which directly notes that China’s “pace of recovery has slowed in recent months” and ties in with the narrative of weakening external demand.
- Malaysian 2023 GDP growth normalising, driven by strong domestic consumption despite declining trade. Malaysian GDP growth is normalising, with 1Q23 growth at +5.6% YoY (2022: +8.7% YoY). Private consumption expenditures (contributing ~61% of Malaysian GDP) was the key support for Malaysian economic growth, supported by broad-based spending from Malaysian consumers and a stable labour market. Trade however was drag to GDP as Malaysian exports deteriorated amidst a weakening external environment, evidenced by declining import levels in Malaysia’s major trading partners (China, US, Singapore etc).
- Malaysia’s inflation outlook relatively better than advanced economies, although core inflation is stubborn. Malaysia’s headline inflation has improved from previous peaks thanks to lower inflation for fuel and fresh food, but core inflation remains on the higher end of BNM’s expectation (2.8% – 3.8%). Elevated core inflation was attributable to the broad-based rise in prices for services-heavy categories such as healthcare, recreation services and restaurants & hotels as well as food prices.
- Malaysian Government Securities (MGS) markets remains relatively insulated from global volatility. MGS yields were largely stable in the run up towards the current MPC meeting, as local markets benefited from foreign inflows. This was despite recent volatility in US fixed income markets which saw yields rise due to an unexpectedly strong US economy and stubborn inflation. Looking forward, domestic catalysts for the fixed income market could arise from unfavourable developments in upcoming state elections.
- OPR to stay at 3.00% for the remainder of 2023, although Ringgit weakness is a wild card. In view of the deteriorating external environment, our economic growth this year will have to rely on domestic consumption. Thus, we expect OPR to stay at 3.00% for the rest of 2023, which is still accommodative to support domestic growth although a further rate hike may be warranted in the event of further Ringgit weakness.
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