On: March 9, 2023 In: Blog, Fixed Income, Knowledge Centre
  • Overnight Policy Rate (OPR) stays unchanged at 2.75%; “wait and see” approach aims to assess the lagging effects of monetary policy. We were expecting a rate hike of 25 bps. Bank Negara Malaysia’s (BNM) elected to keep the OPR unchanged at 2.75%, although this time around the BNM decision was in line with consensus which favoured a pause. BNM continues to emphasize that it left the OPR unchanged to better assess the lagging impact of monetary policy, whilst maintaining that the current rate hike cycle would be driven by a data-driven approach.
  • Minor changes in MPC statement; spotlight remains on growth slowdown and lagging impact of monetary policy. The key themes from the previous MPC (slowing growth and stubborn inflation) remain intact within the latest MPC statement. Despite a nod towards “better-than-expected growth outturns in major economies”, BNM notes that the global growth outlook is still subject to downside risks such as an escalation in geopolitical tensions, higher-than-anticipated inflation outturns etc. However, the domestic outlook is more sanguine as BNM acknowledges that the recently re-tabled expansionary Budget 2023 could prevent the Malaysian economy from suffering a severe slowdown.
  • Malaysia’s inflation outlook remains elevated. Malaysia’s headline Consumer Price Index (CPI) continues to moderate from its peak (Aug’22: +4.7% YoY), although it remains elevated at the +3.7% YoY level as of Jan’23. However, we take comfort in continuing subsidies such as the Price Standardisation Programme which aims to stabilise the prices of essential goods. We remain aware that there may be upside risk to inflation should the current government choose to aggressively pursue its aim of paring down subsidies such as the RON95 fuel subsidy. That being said, Malaysia’s inflation outlook is still under control in comparison with the advanced economies such as the US and UK.
  • Malaysian GDP growth to normalize in 2023. Although BNM remains bullish on the state of Malaysia’s economic recovery, highlighting robust domestic demand, domestic growth will normalise. Tailwinds from the low base effect and expansionary government policy such as Employee Provident Fund (EPF) withdrawals will fade. We also note that the sharp gains of the recovery had occurred in 2022 (+8.7%), after the pandemic, causing growth in 2023 (forecast at +4.5%) to normalize lower due to base effects.
  • Malaysian Government Securities (MGS) markets remains relatively insulated from global volatility. MGS yields were slightly higher in the run up towards the current MPC meeting, with the longer end 10-Year MGS (MGS10Y) trading at ~4% as at the time of writing. Despite recent volatility in US fixed income markets which saw yields rise due to stubborn inflation and surprising US economic resilience, MGS markets remained relatively sheltered with yields rising at a lower quantum compared to the US.
  • Possibility of no more rate hike in 2023. While we were expecting BNM to hike 2 more times to normalise OPR to 3.25%, we expected the rate hikes to be done in 1st quarter. However, BNM has paused in both January and today’s meeting, and kept the OPR at 2.75%. We now feel that there is possibility of no more rate hikes for the rest of the year, as more visible signs of a slowdown start to emerge.

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