Flash Notes

Malaysia: BNM Keeps Rates Unchanged As Growth Risks Loom

    As expected, Bank Negara Malaysia (BNM) kept its Overnight Policy Rate (OPR) unchanged at 3.25%. 22 out of23 analysts surveyed by Bloomberg (including us) expected rates to stay on hold. Only one analyst expected a 25bprate hike. The OPR has been kept unchanged over the last six meetings since September 2014.

    BNM was more dovish in the latest statement with new elaborations highlighting higher downside risks togrowth. BNM stated that “downside risks to growth have increased arising from the moderating growth momentum inthe major emerging market economics, uncertainty in commodity prices and the heightened volatility in financial markets.”On the economy BNM added that “downside risks to growth, however, have risen amid greater uncertainty on both theglobal and domestic fronts. Of significance, Malaysia is entering this challenging period from a position of strength giventhe diversified sources of growth of the economy, low unemployment level, manageable level of external indebtedness, anda well-capitalised banking system. The assessment is therefore for the economic growth to remain within the region of 4.5%to 5.5%.”Although industrial output gained momentum to expand by 6.1% y/y in July (4.3% in June) which was aboveours (5.2%) and market estimates (5.0%), the strong expansion was mainly on account of robust mining sector outputwhile manufacturing output slowed and electricity production contracted further. Given weak global demand andregional manufacturing activity, and dampened consumer and business sentiment amid sharp Ringgit depreciation,we anticipate industrial output to moderate in the periods ahead. On balance, we expect real GDP growth to easefurther to 4.4% y/y in 2H15 after growing 5.3% in 1H15, bringing full year growth to 4.8% in 2015.

    Headline inflation stepped up to 3.3% y/y in July (2Q15: 2.2%; 1Q15: 0.7%) due to higher petrol prices in that monthand lingering effects from GST. Despite the weaker Ringgit, the impact has been offset by lower commodity prices.

    Hence, we expect inflation to pull back in August and September amid a subsequent cut in petrol prices. BNM statedthat headline inflation is expected to peak in early 2016 and moderated for the remainder of next year. We maintainour average inflation outlook of 2.1% in 2015 and 2.7% in 2016 (vs. 3.1% in 2014).