BNM MPC Meeting - No changes expected this yea

 Just as expected, Bank Negara’s Monetary Policy Committee (BNM MPC) announced that the Overnight Policy Rate  (OPR) would be retained at its current level of 3.00%.  This comes after stronger than expected 2Q12 GDP, which proved that the domestic economy is still holding strong despite the less than favourable external circumstance, justifying BNM’s decision. 

 The tone of the statement however remains on the cautious side, as BNM is very well aware of the possible implications of the worsening situation in Europe. As the case with much of Asia, the dependency towards import markets has led to many central banks cutting interest rates in hopes to accommodate their economies. In the last couple of months alone, we have seen China, South Korea and the Philippines slashing their rates. 

 With interest rates at its lowest since the forming of the European Union, the European Central Bank (ECB) is at its wits end trying to save the single currency. No longer able to rely on just lowering interest rates, and now faced with the backlash of harsh austerity throughout troubled states, they have just announced their boldest move yet, an unlimited bond-buying scheme or outright monetary transactions (OMT) aimed at decreasing the costs of borrowing and countering the risks of a fragmentation of the eurozone and the unraveling of the single currency. Across the Atlantic, the USA is facing similar problems of boosting their domestic economy and Ben Bernanke is expected to announce a QE3 (or the like) in the coming week. 

 As mentioned above, many countries here in Asia are facing the repercussions of the situation in the USA and EU and Malaysia is of no exception, as seen from the 2.1% moderation of exports seen in 2Q12. However, the advantage we do have is  strong domestic demand, which posted a 13.8% growth from the 2Q12 GDP, along with record breaking 26.1% growth in capital expansion. The growth in the domestic economy has managed to buffer the effect of externalities, much to the relief of monetary figures.  

 Inflation is also expected to remain somewhat subdued in the remaining months of the year. Currently sitting below 2.0% and with no indication of any price spikes ahead, there is little to no reason for BNM to even consider any rate hikes. There is however, a small possibility of inflationary pressures due to an increase in prices of commodities but low inflation in earlier part of the year should be able to offset, or at the very least mitigate any increases. 

 We continue to stand firm on our belief that there will be no rate changes this year.  The current OPR level is seen to be appropriate for the present economic condition and BNM has assured that external circumstances and its impacts domestically are being monitored closely. Hopefully, the domestic situation will continue to perform well regardless of the situation overseas.

Source: Kenanga