Malaysia: The Doors Open For Central Bank Policy Easing

We are revising our view of Bank Negara Malaysia monetary policy from one of no change this year to one 25bp policy rate cut as early as next quarter (2Q19). There are no forceful arguments for easing just yet, but a pre-emptive easing to support future growth won’t hurt when there is room for such a policy change now.

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Increased scope for pre-emptive BNM easing

We believe the latest consumer price data showing inflation at -0.7% YoY in January, the first negative reading in nearly a decade, has opened the door for a more accommodative monetary policy setting.

There are no forceful arguments for policy easing just yet, but a pre-emptive move to support growth won’t hurt when there is room for such a policy now. We now see the central bank (Bank Negara Malaysia) moving to cut rates at the next policy meeting in early May 2019, a shift from our earlier forecast of no policy change this year.

Balance of risks is tilted toward growth

Following on from the surprising return to deflation in January, both exports and manufacturing growth came in on the softer side, so undermining growth prospects. 

Released today, industrial production growth slowed to 3.2% year-on-year in January, from 3.4% in December. The outcome was better than expected (ING forecast 3.0%, consensus 2.3%). An IP slowdown squares with that in the export sector (at 3.1% growth vs. 5.1%). Among the other activity indicators released alongside the production data, manufacturing sales growth eased slightly (to 7.0% in January vs. 7.5% in December). Employment growth in the sector picked up (to 2.0% vs. 1.7%), but salary and wage growth slowed (to 8.9% vs. 10.1%). 

The balance of economic risks is tilted toward growth. Exports and manufacturing drive GDP and their slowdown in January foreshadow a further GDP slowdown in the current quarter. We expect GDP growth to slow further - to 4.2% in 1Q19 from 4.7% in 4Q18. This is in line with the Bloomberg consensus forecast of 4.3% growth in the current quarter.

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