Bank Negara Malaysia could tighten monetary policy slightly further

Q2 GDP surprised at the upside.

Malaysia’s Q2 GDP growth surprised to the upside, at 6.4% y/y, the highest y/y print since Q4-2012, and on a q/q seasonally adjusted basis, the economy expanded by 1.8%, the fifth consecutive quarter of growth.

According to a research report from Standard Chartered, the surprisingly strong Q2 GDP print poses a dilemma to our current call for a 25bps policy rate hike in November.

Growth momentum is very strong, even though very low imports and strong exports provided a large boost to Q2 growth.

This suggests that Bank Negara Malaysia (BMN) has scope to tighten monetary policy slightly further, the report said.

Here’s more from Standard Chartered:

However, inflation is currently stable, private consumption is easing on a y/y basis, and the risk of financial imbalances is gradually being reduced.

Consumers face more headwinds ahead, and we see scope for BNM to wait until November to discern the impact of July’s rate hike.

Forecasting a hike in September or November is a very close call. On balance, we expect BNM to act pre-emptively.

Private consumption grew strongly for two consecutive quarters on a q/q SA basis in H1-2014. Given tight labour-market conditions, the boost to private consumption ahead of GST implementation in April 2015, and strong external demand, we now see BNM bringing forward its next 25bps rate hike to September 18.

We expect it to pause in November to discern the impact of a cumulative 50bps of rate hikes.