Economic Analysis - Holding Rates Amid MYR, Growth Concerns - JUNE 2017

BMI View: BNM held its OPR at 3.00% during its monetary policy meeting on March 2, which was in line with our expectations. A rate cut would lead to increased capital outflows, placing downside pressure on the already-weak currency. At the same time, growth is starting to gain traction and we do not expect the central bank to hike rates as this could derail growth. We therefore maintain our forecast for the OPR to remain at 3.00% throughout 2017.

Bank Negara Malaysia (BNM's) decision to hold its Overnight Policy Rate (OPR) at 3.00% during its monetary policy meeting on March 2 was in line with our expectations. In its monetary policy statement, the central bank maintained its accommodative monetary policy stance, stating that 'the stance of monetary policy is accommodative and supportive of economic activity' at the current level. We believe that the central bank will continue to focus on maintaining currency stability and ensuring sufficient liquidity in the market by keeping the OPR on hold as interest rate cuts would place downward pressure on the ringgit at a time when the US will continue to hike interest rates. With the economy showing signs of a recovery, BNM is unlikely to hike rates lest this derails growth, while we expect inflation to fall back within the central bank's target range over the coming months. This will enable the central bank to keep the OPR on hold at 3.00% throughout 2017.

Currency Stability Still A Concern

Resistance Line Still Holding Up
Malaysia - Exchange Rate, MYR/USD
Source: BMI, Bloomberg

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