The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
OVERVIEW
Bank Negara Malaysia (BNM) maintained its monetary policy stance at the
latest Monetary Policy Committee (MPC) meeting on Mar 9. The Overnight Policy
rate was left unchanged at 3.25% for the tenth straight MPC meeting or since
July 2014. The Statutory Reserve Requirement (SRR) was also left unchanged at
3.50% after a 50 basis point cut at the previous meeting on Jan 21. The
decision to leave the SRR unchanged at the March meeting is in line with our
expectations but does not rule out the possibility of another cut later this
year to address banking system liquidity concerns. Among major regional central
banks, Bank Indonesia was alone in easing monetary policy this year. Almost all
other central banks in the region including the People’s Bank of China and
Reserve Bank of India decided to leave policy rates unchanged this year after
making rate cuts last year. In its monetary policy statement, BNM reiterated
that domestic financial conditions have since stabilised, although there are
still heightened risks in the global economic and financial environment. Given
such concerns and uncertainty we continue to expect changes to monetary policy
if growth flounders and liquidity conditions worsen. However, we maintain our
base case of no change in the OPR this year.
BNM made an announcement on Mar 9 to maintain its Overnight
Policy Rate (OPR) at the current 3.25%. This was the tenth straight Monetary
Policy Committee (MPC) meeting where the OPR was left unchanged since a one-off
increase of 25 basis points in July 2014. The BNM decision was in line with
market expectations which unanimously predicted no change to the OPR.
The Statutory Reserve Requirement (SRR) was also left
unchanged at 3.50% after a cut at the previous meeting on Jan 21. According to
BNM, overall domestic financial conditions have remained relatively stable.
This was in contrast to the previous monetary policy statement, when BNM cited
volatility in the ringgit exchange rate and domestic financial markets as well
as net external outflows as having led to a moderation in domestic liquidity.
Depending on domestic liquidity conditions and the impact of
another US Federal Reserve rate hike expected to take place before the end of
the year, we do not rule out the possibility of more SRR cuts in the remaining
four MPC meetings scheduled for this year.
Despite reduced GDP growth expectations for the Malaysian
and global economy, BNM assured that the current OPR remains accommodative and
supportive of economic activity. While its monetary policy stance remains
unchanged, BNM reiterated that close monitoring of macroeconomic conditions is
necessary.
Since the last MPC meeting, foreign exchange reserves have
gradually increased. The ringgit has strengthened against the US dollar on the
back of increasing crude oil prices. The USDMYR cross rate was last at 4.1263.
OUTLOOK
We maintain our view that the current monetary stance will
remain unchanged for the remainder of the year, barring any unforeseen risk to
growth.
Looser monetary policy might become necessary if growth
shows signs of slipping below the 4.0%-4.5% official forecast for 2016, but a
shift in policy is unlikely to be made in the next several months as BNM goes
through a leadership change and waits for calmer foreign exchange markets.
The choice of central bank governor to replace the outgoing
Tan Sri Zeti Akhtar Aziz could have a temporary effect on market sentiment as
her succesor has yet to be named ahead of the April 30 handover date.
Our assessment of historical movements in the OPR in
relation to global manufacturing PMI is that current BNM policy stance is about
right. A proxy for worldwide aggregate economic growth shows that manufacturing
activity is well under the 54 global PMI reading that would trigger a rate hike
bias and above the 40 point mark that would signal a rate cut.
The United States Federal Open Market Committee (FOMC) is
expected to make at least two rate hikes this year, a more gradual pace than
the previous tightening cycle.
Kenanga Research, 10 March 2016
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