PP 7767/09/2010(025354)

Malaysia
Economic Highlights
ïMARKET DATELINE

3 September 2010

Bank Negara Maintains The OPR At 2.75%

◆ As expected, Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) took a pause and maintained the
Overnight Policy Rate (OPR) at 2.75% on 2 September, after raising it by a total of 75 basis points in the last
three meetings. This was because the global growth momentum has moderated in recent months. In advanced
economies, growth has slowed by more than expected following continued weakness in the labour market and the
fading impact of the temporary boost to economic activity provided by the inventory build-up and the policy stimulus.
For regional economies, after registering a strong economic expansion in the first half of the year, the slower pace
of export growth will have some impact on economic performance in the 2H as well. As a result, the MPC considers
“the current monetary policy as appropriate and consistent with the latest assessment of the economic growth and
inflation prospects”. Also, at the current level of the OPR, the stance of monetary policy continues to remain
accommodative and supportive of economic growth.

◆ Going forward, despite the adjustment in retail fuel prices in July, BNM expects inflation to rise at a modest pace
in the coming months and into 2011. We expect inflation to increase at a faster pace due to the Government’s
move to raise fuel and sugar prices with effect from 16 July in order to gradually reduce its subsidy. Given that
retail petrol and sugar account for 7.5% and 0.5% respectively of the weight in the Consumer Price index (CPI),
our estimate showed that the increases would add 0.2 percentage point and 0.08 percentage point respectively to
the CPI. As for diesel and LNG, the impact would not be significant due to the low weightage in the CPI (0.2% and
0.5% respectively). As a whole, we believe the direct impact on the CPI is not likely to be very significant
given that the increase was gradual and it will likely be one-off. This, together with some spill-over effect, will likely
push up the CPI in 2H 2010 to around 2.6% yoy, from +1.4% recorded in the 1H. For the full-year, we expect
inflation to trend up to an average of 2.0% in 2010, from +0.6% in 2009. Domestic inflation edged higher
in June and July mainly on account of increases in food and energy prices.

◆ Although the change in administrative pricing will lead to higher inflationary pressure, we believe Bank Negara
Malaysia (BNM) will unlikely act on it. As it stands, its interest rate hikes thus far were geared towards normalising
monetary conditions in the economy rather than controlling inflation. Indeed, we believe the Central Bank is likely
to have done with its interest rate hikes this year, after raising it by a total of 75 basis points in three meetings
and the OPR will likely stay at 2.75% until end-2010. Further out, we believe the Central Bank will likely resume
with its policy normalisation and the OPR will likely be raised by 50-75 basis points in 1H 2011 to bring it
to a more neutral level of 3.25-3.5% by mid-2011.

Table 1
2010 MPC Meetings Schedule

No Date
1st 26 January 2010 (Tuesday)
2nd 4 March 2010 (Thursday)
3rd 13 May 2010 (Thursday)
4th 8 July 2010 (Thursday)
5th 2 September 2010 (Thursday)
6th 12 November 2010 (Friday)

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 3 September 2010

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