BIMB SECURITIES RESEARCH

MARKET INSIGHT
PP16795/03/2013(031743)

6 July 2012

Economics

ECONOMICS

Resisting a Monetary Easing as Growth Momentum Remains Respectable

In a widely anticipated decision, policymakers of the Monetary Policy Committee (MPC) left the OPR unchanged at 3.0% for 7 straight meetings since July 2011. With th the move at the 4 MPC meeting for 2012, Bank Negara Malaysia (BNM) effectively joined other central banks in the region that have either cut (in China and Australia) or kept their policy rates unchanged (in Indonesia, the Philippines, Thailand and Sri Lanka) in June 2012. In view of commendable growth trend and benign inflation outlook, neither policy easing nor tightening is required at present notwithstanding worries that export adversity could remain a drag to a meaningful recovery. Robust domestic demand to make up for significant export slowdown. To justify a rate-cut would need a much more severe slowdown, massive job losses and serious credit crunch, which we think are very unlikely to happen. Current interest rate levels remain largely in line with objectives of price stability and prevention of financial imbalance formation while being supportive of domestic demand-led economic growth against a backdrop of a very challenging global environment. Saving the bullets. In our opinion, it would be better for policymakers to save their ammunition for an emergency situation or when it is really necessary for them to resort to monetary accommodation. For now, interest rates are at levels deemed as adequately accommodative to buttress domestic demand as a shield in grappling with the worsening global prospects due particularly to the deepening Euro zone sovereign debt crisis, coupled with recession in the Euro zone and UK; uneven US recovery and sub-par growth in China, India and Brazil. No immunity to global demand slump? While acknowledging the mounting economic and financial challenges on the global front across several regions in particular in advanced economies, BNM emphasised in the Monetary Policy Statement (MPS) the resilience of domestic demand in particular household spending and investment activities to mitigate the sluggishness in external demand. Although we agree that domestic demand will continue to be the anchor of growth, concerns over the extent to which domestic demand can offset weak export demand should not be totally dismissed especially since export-oriented industries account for 80% of overall industrial production. Export slump, if prolonged, could eventually have adverse implications for employment and purchasing power of workers in export-oriented industries.

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

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Economics
Inflation concerns take a backseat. Unsurprisingly, BNM reaffirmed that inflation is expected to remain modest and manageable for the remainder of this year, highlighting how excess capacity in the system could limit the possible upside influence of solid domestic demand on inflation and how sustained downtrend in global commodity prices will help contain inflationary pressures. Still, we should remain wary of lingering upside risks to inflation in the pipeline as a result of both domestic and external factors such as a sudden reversal in global commodity prices in particular related to food and energy due to supply chain disruptions, a surge in global surplus liquidity and heightened geopolitical concerns as well as stricter implementation of PEMANDUs Subsidy Rationalisation Plan and hence, huge subsidy cuts. All these potential inflation drivers could very well limit the space for monetary easing notwithstanding the scores of downside risks to growth. Nonetheless, we believe the income effects from the implementation of minimum wage policy for some 3.2m private sector workers and 7%-13% increments for some 1.4m civil servants would turn out to be fairly muted. Inflationary pressures remain in check increased scope for monetary easing if needed. Assuming no upward revision to retail prices of subsidised items in particular petrol and diesel and barring other unforeseen circumstances, we forecast headline inflation rate to average around 2.0% in this year, a significant easing from 3.2% in 2011 and below the official targeted range of 2.5%-3.0%. Nevertheless, receding inflationary pressures should allow BNM to hold its benchmark interest rate at 3.0% throughout 2012 while enhancing the latitude to exercise a cut option should the global outlook worsen or in the event of a catastrophic development. While vigilance will remain the mot dordre at all times in monitoring and assessing evolving conditions and their implications, we believe MPC stands ready to take the most appropriate action when push comes to shove

Changes in OPR Levels Since 26 April 2004

Schedule of MPC Meetings for 2012

Meeting Number 1st 2nd 3rd 4th 5th 6th

Dates Tuesday, 31 January 2012 Friday, 9 March 2012 Thursday, 3 May 2012 Thursday, 5 July 2012 Thursday, 6 September 2012 Thursday, 8 November 2012

Source: Bloomberg, BIMB Securities

Source: BNM, BIMB Securities

www.bimbsec.com.my

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Economics
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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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