Malaysian central bank starts policy normalisation

Bank Negara Malaysia (BNM), the central bank raised the overnight policy rate by 25bp to 3.25% today, the first policy move since July 2016 when BNM had eased by 25bp. The hike was well-flagged by BNM at the previous policy meeting in November, widely predicted by 16 out of 20 forecasters in the Bloomberg poll, and priced in by the markets as evident from accelerated Malaysian ringgit appreciation since early November. Therefore, we expect little to no market impact from the rate hike.

Today’s BNM move takes the policy rate to the level where the post-2008 Global Financial Crisis tightening cycle had left it at. With the policy rate likely hitting the historical (since BNM implemented new interest rate framework on 26 April 2004) peak of 3.50% within the current year, we do not anticipate the current tightening cycle to stretch for too long.

We forecast one more 25bp BNM rate hike in the third quarter, after the political uncertainty associated with general elections in August lifts. At the moment we see no strong reasons for the BNM to tighten policy too much. The economy remains on a firm footing to eke out a 5%-plus growth for another year in 2018. Rising global commodity prices should support exports as election spending works its way to boost strong domestic demand. Absent a supply shock to food prices or an oil shock to fuel prices, the inflation outlook for this year appears to be benign.

Against such an economic backdrop, the relative undervaluation offers the Malaysian Ringgit sufficient scope to outperform Asian peers again in 2018. We are reviewing our end-2018 USD/MYR forecast of 3.78% for downward revision.