Thursday, May 5, 2011

Bank Negara Malaysia (BNM) Statement, March 2011

# BNM MPC raised the OPR by 25bps to 3.00%. The decision was in line our expectation and was predicted by seven out of 16 economists surveyed by Bloomberg News.

# The MPC said growth in the advanced economies remained modest while regional growth remained strong. However, the MPC acknowledged that downside risks have increased, arising from higher commodity prices, possible supply disruptions arising from Japan tragedy, and the heightened capital flows to emerging economies.

# The MPC expected the Malaysian economy to remain firmly on a steady growth path, with growth improving gradually underpinned by sustained private consumption and strengthening of private investment.

# On inflation, the MPC said domestic demand factors could exert upward pressure on prices in 2H 2011.

# In a separate press statement, BNM announced that the SRR ratio will be raised to 3% from 2% effective 16 May 2011 as a “pre-emptive.

# As expected, BNM appeared to be not so worried on growth momentum as global economy has remained resilient even after series of external events.

# In our view, so long as GDP growth path is firmly on track to achieve at least 5% in 2011, BNM will continue on its rate normalization path, albeit at a slow pace. Once the ETP implementation is intensified from 2H onwards, GDP growth may shoot above 6%, beyond the long-term potential growth level of 5%. Arising from this, raising the OPR back to 3.5% level over the longer-term is necessary to prevent imbalances and misallocation of resources.

# As growth has shown signs of stabilizing with inflation posing as an imminent issue, we now expect another 25bps rate hike by end of this year. Judging from the MPS, BNM has not decided on the timing of next rate hike. At this juncture, we believe BNM will stay pat until (i) firmer sign of domestic growth strengthening, i.e. kickstart of ETP projects, or (ii) inflation shooting past BNM’s high-end range of 3.5%. At this juncture, we believe next rate hike is in September rather than in July. Till the next MPC meeting in July, BNM can only assess the economic data up to May, which in our view may not be convincing enough to justify a further rate hike.

# On the SRR, the hike surprised us as we had expected the move to be done in June (similar to China’s alternate arrangement). With surplus liquidity remaining high after the first 1% hike effective 1 April (Figure #3), we now see BNM expediting the SRR normalization to reach 4% by 3Q. Nevertheless, any major reversal of capital flows (which in our view is unlikely in 2011) may cause BNM to stay pat on sudden contraction in domestic liquidity.

BNM 3-2011

Source: HLeBroking

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