BIMB SECURITIES RESEARCH

MARKET INSIGHT
PP16795/03/2013(031743)

12 March 2012

Economics

ECONOMICS

OPR to hold steady at 3.0% to buttress the resilient domestic demand

Less urgency for rate-cuts on somewhat improving global economic outlook and less stress in international financial markets as inflation could rear its ugly head given rising global energy prices and higher salary for civil servants. As widely anticipated, Bank Negara Malaysia (BNM) maintained its policy rate, the Overnight Policy Rate (OPR) at 3.00% at the second meeting of the Monetary Policy Committee (MPC) for 2012, replicating a similar action in Indonesia and South th Korea last week. This marks the 5 consecutive meeting that BNM has kept its benchmark interest rate unchanged since May 2011 after raising the OPR four times at 25 bsp each in a monetary tightening cycle that began in March 2010. At this juncture, we are of the opinion that signs of diminishing downside risks to growth both at home and abroad to a certain extent as well as improving global financial conditions have reduced the urgency for rate-cuts although we dont rule out a downgrade to the official GDP growth forecasts for 2012 to between 4% and 5% from the current 5%-6% range at the release of BNMs Annual Report 2011. Neither dovish, nor hawkish bias but growth is still more of a concern than inflation. Although the latest Monetary Policy Statement (MPS) appears less gloomy, acknowledging improvement to global economic and financial conditions since the last MPS thanks partially to measures recently introduced to solve the European sovereign debt crisis and the US tentative recovery, the general outlook remains subdued for advanced economies and easing momentum in emerging economies in particular Asia which will remain the global growth leader in 2012 given the global trade slump. Simultaneously, as Malaysias headline inflation has come off to 2.7% in January 2012 from its peak of 3.5% in June 2011, MPC members noted receding inflationary pressures in 2012 while taking cognisance of the risk of supply disruptions and the possible financialisation in commodity markets, resulting in higher commodity prices which could pose risk to the inflation outlook. Readiness to act more aggressively with monetary stimulus if necessary given the pro-growth bias. As such, while the tone of the MPS appears largely neutral, assigning almost equal importance to upside risks to inflation and downside risks to economic growth, we think the balance of risks remains rather skewed towards worries about growth given a plethora of global headwinds and the risk that domestic demand may disappoint. Although domestic demand is generally expected to remain resilient, driven by both private and public consumption as well as capital spending on projects under the Economic Transformation Plan and th 10 Malaysia Plan, domestic-oriented and resource-based industries, we believe BNM will not hesitate to reverse the monetary direction on conclusive indication of deterioration in domestic demand and/or financial conditions and/or worsethan-expected softness in external demand.

The Research Team research@bimbsec.com.my 03-26918887 ext 111

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Loss of vigour for intermediate goods imports, an important forward looking indicator for exports and industrial production. A huge pipeline of projects th allocated under the Economic Transformation Programme and the 10 Malaysia Plan contributed to the persistently robust growth momentum for imports of capital goods, which surged by 30.8% YoY in January 2012. While the 19% YoY jump in consumption goods imports could be an indicator of a resilient consumer spending, we are disheartened by the 4.3% YoY drop in imports of intermediate goods which could point to continued moderation in exports over the next few months. Higher imports of 3.3% YoY in January 2012, with ASEAN (27.2%), China (15.4%), Japan (10%) and US (8.6%) saw trade surplus to plunge by 12.4% YoY to RM8.75bn thus Malaysias total trade rose 1.7% YoY in January 2012 to RM101.39bn. Inflation fears remain a hurdle to an easier monetary policy. Although there is ample room for a looser monetary policy given moderating inflation, we pencil in no change to the OPR throughout 2012 since severe conditions to trigger a ratecut are simply absent while the recent surge in global oil prices as well as the 7%13% salary hike for 1.4 million civil servants and the RM50 increase in the Cost of Living Allowance for the B and C areas under the recently improved Malaysian Remuneration Scheme could fuel inflation expectations. Signs of contained downside risks to global growth and financial stability as well as potential upward pressures on inflation from lofty global commodity prices especially related to th energy and food, higher wages and post-13 General Election subsidy cuts could lead BNM to stand pat until end-2012.

www.bimbsec.com.my

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BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2691 8887, Fax: 03-2691 1262 http://www.bimbsec.com.my

Kenny Yee Head of Research

www.bimbsec.com.my

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