Bank Negara Malaysia likely to keep the OPR at 3.00 pct for the rest of the year, says DBS Bank

Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) at 3.00 percent in the recent policy review. The authority acknowledged the better than expected economic performance thus far amid an improving global outlook.

GDP growth in 1Q17 registered a robust expansion of 5.6 percent y/y against a consensus expectation of 4.8 percent. Sequentially, the pace of growth picked up to 1.8 percent q/q on a seasonally adjusted basis, up from 1.3 percent q/q previously. Overall GDP for the full year is expected to hit 5.0 percent, which is at the upper end of the official forecast range of 4-5 percent, DBS Bank reported.

However, headline CPI inflation is expected to continue to moderate. Though inflation has surprised on the upside over the past months, it has peaked and is expected to ease steadily over the course of the year. The key driver had been transport inflation, which should ease off in 2H17 after the low base effect dissipates.

In fact, June inflation due this week should further reinforce this point. On the other hand, policymakers expect core inflation to be sustained by robust domestic demand but is expected to remain contained. Indeed, core inflation has remained below policy rate at about 2.5 percent year-to-date.

"So, with inflation risk easing and growth outlook likely to remain sanguine, Bank Negara is in a sweet spot to keep the OPR at 3.00 percent for the rest of the year," the report commented.

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