Inflation to normalise in second half
This was hot on the heels of BNM’s Monetary Policy Committee (MPC) keeping the overnight policy rate (OPR) unchanged at three per cent for its sixth straight meeting on Thursday, which was generally in line with analysts’ expectations.
According to the research arm of RHB Research Sdn Bhd (RHB Research), the central bank views the economic activity in the advanced and emerging economies as beginning to synchronise, with global trade and industrial activity exceeding earlier expectations.
BNM sees higher growth prospects in the advanced economies, amid the broad-based increase in investment as well as the steady growth in consumption.
Nevertheless, BNM continued to highlight downside risks to global growth – such as geopolitical and financial market developments and the volatility in commodity prices – which could reignite financial market volatility.
On the domestic front, BNM projects that the Malaysian economy to register higher growth in 2017, on account of more favourable global growth prospects, which translates into sustained export performance that would spill over to the domestic economy.
“Looking forward, we expect BNM to maintain OPR at three per cent for the rest of 2017.
“We believe BNM would unlikely hike interest rates on expectations that inflation would normalise and moderate in the 2H, while economic growth has just picked up and ringgit has stabilised somewhat,” said RHB Research.
On a similar view, Maybank Investment Bank Bhd’s research arm (Maybank IB Research) also believed Malaysia’s domestic economy would remain steady in 2H17, amid the sychronised pick up in global economic activities that is positive for Malaysia’s exports.
This was on the back of steady domestic demand, driven by continued wage and employment growth.
It also believed that Malaysia’s economy would be further supported by the implementation of new and on-going investment projects with capacity expansion in manufacturing and services sectors.
On the other hand, RHB Research said stronger domestic economic growth in the country – coupled with more aggressive rate hikes and plans to reduce the US Fed’s balance sheet – would likely limit the scope for BNM to cut interest rates.
Looking at the future, the research arm of AmInvestment Bank Bhd (AmInvestment Bank) remained unconvinced that there would not be a rate hike this year as it retained a 45 per cent probability of a rate hike, despite the recent healthy export, manufacturing output, and manufacturing sales figures.
“Room to revise upwards our probability is somewhat curtailed by weak Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) data.
“Iin June, it dropped to 46.9 which is the lowest reading since this survey began five years ago, a drop in the output and new orders from PMI data in June, and approved business loans which fell for two consecutive months, with applications for business loans in the negative growth trajectory since March 2017.
“It explains why companies are streamlining their stocks as reflected by the drop in inventory purchases, suggesting the underlying demand may not be as strong as envisaged,” it explained.
The research team also pointed out that although the economy registered strong 1Q17 gross domestic product (GDP) growth of 5.6 per cent, room for correction to take place is in the cards.
“To maintain our full-year GDP growth projection of five per cent and inflation averaging at four per cent, we foresee the need to maintain the current accommodative monetary policy with the aim to support both business activities and consumer spending,” AmInvestment Bank suggested.
Looking further ahead, RHB Research believed that the monetary policy stance is tilted towards the upside in 2018.
“We believe the central bank would have more room to increase OPR by 25 bps to 3.25 per cent next year, as major global central banks are stepping up talk to tighten monetary policies and the Malaysian economic growth is projected to improve further.
“This suggests that the domestic negative real interest rates would likely be reversed as interest rates rise and inflation moderate in 2018,” it opined.
Nevertheless, it said, as it stands, this was MPC’s sixth consecutive meeting that saw OPR being put on hold, after it was reduced by 25 bps in July 2016.
“The move was widely expected as the headline inflation has begun to normalise in April to May and would unlikely be a major policy concern. At the same time, ringgit had also stabilised as a result of BNM’s forex measures and a weakness in US dollar,” it added.
Aside from that, Maybank IB Research also believed that a key area for caution is the uncertainties on the external front, arising from the emerging prospect of sychronised monetary policy normalisation by major central banks amid current low financial market volatility.
Source: Borneo Post Online