Bank Negara Malaysia in its final MPC meeting this year maintained the Overnight Policy Rate (OPR) at 3.00%, making this the ninth pause in a row, in line with its forecast said CGS Investment Bank today. The decision it added was also widely expected as the consensus in a Bloomberg poll had expected the status quo.

Resilient domestic expenditure to anchor economic growth
Comparing the current MPC statement against that issued on 5 Sep 2024, the tone remains neutral. On the global side, one key change in the statement where BNM added 'heightened' volatility in global financial markets despite staying pretty much optimistic on the global trade and labour markets. As for the domestic economy, BNM is confident on the strength of Malaysia's economic activity, highlighting 'higher tourist spending' and 'higher realisation of approved investment'. BNM expects the investments will also 'raise exports and expand productive capacity of the economy' while Budget 2025 measures will
provide further support to domestic growth. Most importantly, BNM added that it expects Malaysia's Consumer Price Index (CPI) to 'remain manageable' in 2025F owing to 'easing global cost conditions and the absence of excessive domestic demand pressures'.

However, BNM noted that the outlook is 'subject to details of the implementation of announced domestic policy measures'. CGS thinks this could indicate that BNM is comfortable on Malaysia's economic progress but remain cautious about its 2025F economic outlook. Despite BNM's modest outlook on 2025F inflation, the house suspects there is high potential for Malaysia's inflation to trend higher owing to changes to prices stemming from the government's plan to reevaluate policies and subsidies. For instance, the Sales and Services Tax (SST) scope to be expanded in 2025 where details of the sectors that may take a hit have yet to be announced. Meanwhile, the announcement that the RON95 fuel subsidy would be revised in mid-2025 and affect 15% of households could raise the CPI but that would only occur in 2H25F.

CGS said that based on its estimates, such adjustments would only add 20bp to annual CPI growth in 2025F. Nonetheless, despite the potential uptick in the headline CPI growth, the house thinks this may not indicate any changes in policy ahead, in its view. Hence, it maintains it CPI projection at 1.8% for 2024F and 2.0% for 2025F pending further updates on the government's subsidy rationalisation measures and SST expansion scope.

Strength in RM may support economic growth prospects
The MPC statement also added a paragraph on the ringgit's performance, attributing the performance as mainly 'driven by external factors'. With the conclusion of the US election, BNM opined that the ringgit could be volatile in the near term. According to the statement, 'Looking ahead, the narrowing interest rate differentials between Malaysia and the
advanced economies is positive for the ringgit'

CGS  said it believes BNM remains confident on the ringgit's performance owing to the country's 'favourable economic prospect complemented by ongoing initiatives to encourage flows' which likely did not impact its decision on the OPR despite considering the easing monetary policy in the US (the US Federal Reserve will announce its policy rate tonight). The house maintains its view that the OPR will be kept at 3.0% in 2025F.