OCBC Bank sees 70% probability BNM will keep OPR unchanged

• “Core inflation eased to a lesser extent compared to headline inflation but the direction implies that inflationary pressures are easing.”

KUALA LUMPUR (July 4): Bank Negara Malaysia (BNM) will highly likely, at a probability of 70%, maintain the overnight policy rate (OPR) at 3.00% at its meeting on Thursday (July 6), due to slowing growth momentum and easing inflationary pressures, according to OCBC Bank.

OCBC Bank senior Asean economist Lavanya Venkateswaran in a research note on Tuesday (July 4) said that after the 25 basis points (bps) surprise hike at BNM’s May 3 meeting, the weaker incoming activity data points to slower growth momentum in the second quarter. 
 
She pointed out that on the domestic front, April wholesale and retail sales growth slowed to 3.2% year-on-year (yoy) and 12.9% from 5.5% and 19.5% in first quarter (1Q). 
 
While on the external front, export and import growth slowed to 9.4% yoy and 7.1% in April/May from 2.8% and 3.7% in 1Q. 
 
“That said, there were some pockets of strength with capital goods imports (12.5% in April/May from 0.2% in 1Q) and consumer goods imports (1.5% in April/May from 0.9% in 1Q) holding up. Taken together, growth momentum is slowing and the incoming data is broadly consistent with our forecast for GDP [gross domestic product] growth to slow to 4.9% y-o-y in 2Q from 5.6% in 1Q,” said Lavanya. 
 
On inflation, the economist said pockets of domestic demand resilience have manifested in stickier core inflationary pressures compared with headline inflation. 
 
“Core inflation eased to a lesser extent compared to headline inflation but the direction implies that inflationary pressures are easing,” Lavanya said. 
 
However, the main unknown for the inflation picture is from the government’s plan for targeted subsidy rationalisation. 
 
The government is adding a surcharge of 10 sen/kWh in the electricity tariff for households exceeding 1,500kWh starting in July 2023 while reducing electricity surcharge rates for non-residential consumers including commercial and industrial users. 
 
“This will mitigate some of the inflationary impact and we estimate headline inflation will be pushed by 0.1pp [percentage point] for the rest of 2023. Easing food and fuel prices, however, will continue to provide an offset,” she said. 
 
The bank maintains a 2023 headline consumer price index forecast of 2.9%, within BNM’s 2.8-3.8% forecast range. 
 
“The bigger impact to inflation may be from targeted fuel subsidies which are still under discussion,” said Lavanya. 
 
“That said, the risk of additional tightening will rise more noticeably, in our view, if inflationary pressures build from the implementation of targeted fuel subsidies,” the senior economist said.