On: May 5, 2023 In: Blog, Fixed Income, Knowledge Centre
  • Bank Negara Malaysia raised the Overnight Policy Rate (OPR) by 25bps to 3.00%, citing a resilient Malaysian economy. After pausing in 1Q23 to assess the lagging effects of monetary policy, Bank Negara Malaysia (BNM) elected to raise the OPR by 25bps to 3.00%. The hike came as a surprise as consensus favoured an unchanged OPR (16 of 19 Bloomberg survey participants called for a pause). To justify the rate hike, BNM has cited the resilient domestic economy, taking into consideration still-strong consumption from Malaysian consumers and declining unemployment.
  • MPC statement highlights domestic economic resilience and stubborn core inflation. The key themes from the previous MPC (potential deterioration in external conditions and stubborn inflation) remain intact within the latest MPC statement. However, BNM notes that domestic growth will be driven by consumption which has stayed resilient despite previous rate hikes, as seen in the following excerpt “no signs of excessive tightening affecting consumption”. BNM has also elaborated on the relationship between economic resilience and the stubbornness of core inflation, directly noting that “core inflation will remain at elevated levels amid firm demand conditions”.
  •  Malaysian 2023 GDP growth to normalise but remain resilient, driven by strong domestic consumption and declining unemployment. Malaysian GDP growth will likely normalise to a range between +4% to +5% YoY (2022: +8.7% YoY) as tailwinds from the low base effect and the Employee Provident Fund (EPF) withdrawals fade. Nevertheless, we remain comforted by domestic consumption which remains strong, evidenced by growing retail sales and purchases of motor vehicles. Similarly, the decline in unemployment will continue to act as a pillar of support for domestic consumers, with the jobless rate notably falling to 3.5% in Feb’23 (lowest since Feb’20).
  • Malaysia’s inflation outlook relatively better than advanced economies but core inflation is stubborn. Malaysia’s headline Consumer Price Index (CPI) continues to moderate from its peak (Aug’22: +4.7% YoY), although Core CPI is still elevated at +3.8% YoY as of Mar’23. Core inflation has remained stubborn due to price increases in segments such as recreation services and culture, as well as miscellaneous goods and services. We remain aware that there may also be upside risk to headline inflation should the current government choose to aggressively pursue its aim of paring down subsidies such as the RON95 fuel and diesel subsidy.
  • Malaysian Government Securities (MGS) markets remains relatively insulated from global volatility. MGS yields were already on a downtrend in the run up towards the current MPC meeting with the yield curve shifting downwards throughout March and April as local markets benefited from foreign inflows. This was despite recent volatility in US fixed income markets which saw yields rise and fall significantly due to stubborn inflation and the ongoing US banking crisis. Contagion from the US bank failures was absent in Malaysian markets, largely attributable to the proactive and calming nature of BNM’s response as well as the well-capitalised nature of the local banking sector.
  • OPR to stay at 3.00% for the remainder of 2023. In view of the deteriorating external environment, our growth this year will have to rely on domestic consumption. As such, we expect OPR to stay at 3.00% for the rest of 2023, which is still accommodative to support domestic growth.

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