bimbsec - economics - opr @ 4th mpc meeting 2012 - 20120706

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BIMB SECURITIES RESEARCH

MARKET INSIGHT6 July 2012

Economics

PP16795/03/2013(031743)

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ECONOMICS Resisting a Monetary Easing as Growth MomentumRemains Respectable

In a widely anticipated decision, policymakers of the Monetary Policy Committee

(MPC) left the OPR unchanged at 3.0% for 7 straight meetings since July 2011. With

the move at the 4th

MPC meeting for 2012, Bank Negara Malaysia (BNM) effectively

joined other central banks in the region that have either cut (in China and Australia)

or kept their policy rates unchanged (in Indonesia, the Philippines, Thailand and Sri

Lanka) in June 2012. In view of commendable growth trend and benign inflation

outlook, neither policy easing nor tightening is required at present notwithstanding

worries that export adversity could remain a drag to a meaningful recovery.

Robust domestic demand to make up for significant export slowdown. To justify a

rate-cut would need a much more severe slowdown, massive job losses and serious

credit crunch, which we think are very unlikely to happen. Current interest rate

levels remain largely in line with objectives of price stability and prevention of

financial imbalance formation while being supportive of domestic demand-led

economic growth against a backdrop of a very challenging global environment.

Saving the bullets. In our opinion, it would be better for policymakers to save their

ammunition for an emergency situation or when it is really necessary for them to

resort to monetary accommodation. For now, interest rates are at levels deemed as

adequately accommodative to buttress domestic demand as a shield in grappling

with the worsening global prospects due particularly to the deepening Euro zone

sovereign debt crisis, coupled with recession in the Euro zone and UK; uneven US

recovery and sub-par growth in China, India and Brazil.

No immunity to global demand slump? While acknowledging the mounting

economic and financial challenges on the global front across several regions in

particular in advanced economies, BNM emphasised in the Monetary Policy

Statement (MPS) the resilience of domestic demand in particular household

spending and investment activities to mitigate the sluggishness in external demand.

Although we agree that domestic demand will continue to be the anchor ofgrowth, concerns over the extent to which domestic demand can offset weak

export demand should not be totally dismissed especially since export-oriented

industries account for 80% of overall industrial production. Export slump, if

prolonged, could eventually have adverse implications for employment and

purchasing power of workers in export-oriented industries.

The Research Team

[email protected]

03-26918887 ext 111
mailto:[email protected]:[email protected]


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Inflation concerns take a backseat. Unsurprisingly, BNM reaffirmed that inflation is

expected to remain modest and manageable for the remainder of this year,

highlighting how excess capacity in the system could limit the possible upside

influence of solid domestic demand on inflation and how sustained downtrend in

global commodity prices will help contain inflationary pressures. Still, we should

remain wary of lingering upside risks to inflation in the pipeline as a result of both

domestic and external factors such as a sudden reversal in global commodity prices

in particular related to food and energy due to supply chain disruptions, a surge in

global surplus liquidity and heightened geopolitical concerns as well as stricter

implementation of PEMANDUs Subsidy Rationalisation Plan and hence, huge

subsidy cuts. All these potential inflation drivers could very well limit the space for

monetary easing notwithstanding the scores of downside risks to growth.

Nonetheless, we believe the income effects from the implementation of minimum

wage policy for some 3.2m private sector workers and 7%-13% increments for some

1.4m civil servants would turn out to be fairly muted.

Inflationary pressures remain in check

increased scope for monetary easing ifneeded. Assuming no upward revision to retail prices of subsidised items in

particular petrol and diesel and barring other unforeseen circumstances, we

forecast headline inflation rate to average around 2.0% in this year, a significant

easing from 3.2% in 2011 and below the official targeted range of 2.5%-3.0%.

Nevertheless, receding inflationary pressures should allow BNM to hold its

benchmark interest rate at 3.0% throughout 2012 while enhancing the latitude to

exercise a cut option should the global outlook worsen or in the event of a

catastrophic development. While vigilance will remain the mot dordre at all times

in monitoring and assessing evolving conditions and their implications, we believe

MPC stands ready to take the most appropriate action when push comes to shove

Changes in OPR Levels Since 26 April 2004 Schedule of MPC Meetings for 2012

Source: Bloomberg, BIMB Securities Source: BNM, BIMB Securities

Meeting Number Dates

1st Tuesday, 31 January 2012

2nd Friday, 9 March 2012

3rd Thursday, 3 May 2012

4th Thursday, 5 July 2012

5th Thursday, 6 September 2012

6th Thursday, 8 November 2012


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DEFINITION OF RATINGS

BIMB Securities uses the following rating system:

STOCK RECOMMENDATION

BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months.

TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain.

NEUTRAL Share price may fall within the range of +/- 10% over the next 12 monthsTAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels.

TRADING SELL Share price may fall by more than 15% in the next 3 months.

SELL Share price may fall by more than 10% over the next 12 months.

NOT RATED Stock is not within regular research coverage.

SECTOR RECOMMENDATION

OVERWEIGHT The Industry as defined by the analysts coverage universe, is expected to outperform the relevant primary

market index over the next 12 months

NEUTRAL The Industry as defined by the analysts coverage universe, is expected to perform in line with the relevant

primary market index over the next 12 months

UNDERWEIGHT The Industry as defined by the analysts coverage universe, is expected to underperform the relevant primary

market index over the next 12 months

Applicability of ratings

The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment

ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the

coverage do not carry investment ratings as we do not actively follow developments in these companies.

Disclaimer

The investments discussed or recommended in this report not be suitable for all investors. This report has been prepared for

information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB

securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group

and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The

information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to

ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it

should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and

estimates included in this report constitute our judgements as of this and are subject to change without notice. BIMB Securities Sdn

Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X)

A Participating Organisation of Bursa Malaysia Securities Berhad

Level 32, Menara Multi Purpose, Capital Square,

No. 8 Jalan Munshi Abdullah,

50100 Kuala Lumpur

Tel: 03-2691 8887, Fax: 03-2691 1262 Kenny Yee

http://www.bimbsec.com.my Head of Research
http://www.bimbsec.com.my/http://www.bimbsec.com.my/http://www.bimbsec.com.my/

bimbsec - economics - opr @ 4th mpc meeting 2012 - 20120706

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