Bank Negara likely to cut rates following slower-than-potential economic growth

Bank Negara Malaysia (BNM) is expected to cut rates in the upcoming monetary policy meeting, following slower-than-potential economic growth in country. Expenditure by the state has obviously slowed in 2H16 in an attempt to ensure that the fiscal deficit target is being met.

The economy expanded by 4.3 percent y/y in 3Q16 and underscores the point that underlying growth fundamentals have remained resilient despite a challenging economic climate. Sequentially, growth picks up to 1.5 percent q/q, on a seasonally adjusted basis, from 0.7 percent previously.

Domestic demand has been instrumental with private consumption growth holding up at 6.4 percent y/y, up marginally from 6.3 percent previously. Consumers appeared to have remained sanguine even though there have been some signs of softening in the labour market.

Amid the pick-up in external headwinds, export growth has turned negative in the quarter. Sales fell by 1.3 percent y/y, compared to an expansion of 1.0 percent previously. In fact, the drag from the external balance would have been even greater if not for a relatively sharper decline in import demand. Import growth register -2.3 percent in the quarter, which has helped offset the drop in exports.

Growth fundamentals appear to be holding up despite the challenging external economic conditions. Year-to-date, the economy has expanded by 4.2 percent, which is smack on track to meet the full year GDP growth forecast, DBS reported.

"But at such a pace, growth is still considerably weaker than potential growth of about 5.0 percent in our opinion. Such slower than potential growth pace essentially will keep the door open for a final 25bps cut by Bank Negara in the upcoming policy meeting," the report commented.