Download OPR remain unchanged at 3.00%

Economic Research, Strategic Management
Friday, March 3 2017 / 4 Jamadilakhir 1438H
Dr. Mohd Afzanizam Abdul Rashid | Chief Economist | 03-2088 8075 | [email protected]
OPR remain unchanged at 3.00%
Facts
The BNM’s Monetary Policy Committee (MPC) meeting yesterday decided to keep the Overnight
Policy Rate (OPR) unchanged at 3.00%. The accompanying statement indicated that the
committee members are of the view that inflation rate will continue to remain high at least in
the 1H2017 before moderating in the subsequent period. However, the BNM put a disclaimer
that such view is heavily dependent upon the outlook of oil prices which is highly uncertain. The
current OPR level is deemed to be accommodative and supportive to growth. The next meeting
will be held on 12 May.
Chart 1: Overnight Policy Rate (OPR) %
3.50
3.30
3.10
3.00
2.90
2.70
2.50
2.30
2.10
1.90
1.70
1.50
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Source: Bloomberg
Our view
We have recently revised our 2017 inflation forecast from 2.1% to 3.4%. This was on account
of higher food and fuel prices. The difference between the 10- and 3-year MGS yields showed
that such spread was narrowing to 76 basis points as of yesterday compared to 86 basis points
in early February. This suggests that the yield curve is flattening owing to the sharp rise in the 3year MGS yields. What it means is that the yield curve is implying that the BNM may not incline
to cut rates as short dated securities typically reflect central bank action. We believe the BNM
has less flexibility to cut the OPR in view of higher inflation rate. Also there is a need to ensure
real rates of return to remain positive in order to encourage savings. As such, we are
maintaining our call that the OPR will remain at 3.00% for the rest of the year.
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Economic Research, Strategic Management
Friday, March 3 2017 / 4 Jamadilakhir 1438H
Chart 2: Difference between 10- and 3-year MGS yields (yield curve)
1.20
1.00
0.80
0.60
0.40
0.20
-
Source: Bloomberg
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Economic Research, Strategic Management
Friday, March 3 2017 / 4 Jamadilakhir 1438H
Monetary Policy Statement
At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to
maintain the Overnight Policy Rate (OPR) at 3.00 percent. Economic activity in the advanced and
emerging economies has continued to improve. Global trade is also showing a recovery. In this
environment, the Asian economies are benefiting from stronger external demand amid
sustained domestic activity. For 2017, the global economy is projected to expand at a slightly
faster pace. Nevertheless, there remain risks to global growth arising from threats such as
protectionism, geopolitical developments, heightened volatility of financial markets and
negative developments in the prices of key commodities. Despite the challenging global and
domestic environment, the Malaysian economy expanded by 4.2% in 2016. Growth was
underpinned by private sector activity, with additional support from the turnaround in net
exports. The growth momentum is expected to be sustained in 2017. With the growth of
domestic demand being sustained, the more positive contribution from the external sector will
lead to a better performance of the Malaysian economy. Headline inflation is projected to be
higher in 2017, reflecting primarily the pass-through impact of the increase in global oil prices
on domestic retail fuel prices. Headline inflation would remain relatively high in the first half of
the year before moderating thereafter. However, the projected trajectory of domestic headline
inflation will be dependent on the future trend in global oil prices which remains highly
uncertain. The cost-driven inflation is not expected to have a significant impact on the broader
price trends given the stable domestic demand conditions. Core inflation is expected to increase
modestly.The ringgit, along with other emerging market currencies, has continued to stabilise.
The implementation of financial market development measures has had a positive impact on
the domestic financial markets. Banking system liquidity remains sufficient. Financial institutions
continue to operate with strong capital and liquidity buffers and the growth of financing to the
private sector is consistent with the pace of economic activity.At the current level of the OPR,
the stance of monetary policy is accommodative and supportive of economic activity. The MPC
will continue to assess the balance of risks surrounding the outlook for domestic growth and
inflation.
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