A stable monetary policy stance likely to prevail for now in Malaysia

Bank Negara is likely to maintain the Overnight Policy Rate (OPR) at 3.25% in today's meeting. It is all about balancing the risks between growth and inflation. And CPI inflation has remained at elevated level while downside risk to growth has also heightened. 

"Though latest inflation reading for December15 has fell short of our forecast of 3.0%, it remains fairly high at 2.7%. This put 2015 full year inflation at 2.1%, perfectly in line with our forecast", notes DBS Group Research.

The price barometer is expected to rise further in 2016. A full year inflation of 2.8% is expected. In fact, a low base will set in over the coming six months, which will lift inflation above the 3% mark. But note that this is purely technical and transient in nature. Inflation will ease going into 2H16. 

Key risk for Bank Negara is on growth. Growth risk will outweigh inflation risk in 2016. Low energy prices, as well as the expiry of the base effect and GST impact will make for lower inflation in 2H16. Meanwhile, growth outlook has become more uncertain with the slowdown in China and the uneven recovery in the US amid US Fed's monetary normalisation. The ongoing equity market routs and depreciation in Asia currencies are evidence of the shaky investors' confidence and risk aversion in the markets. 

A dovish bias is expected in the central bank rhetoric. Although a neutral monetary policy stance will prevail in the near term, expect an increasingly more accommodative inclination if growth continues to moderate. Perhaps the only thing holding back policymakers from an outright easing is the strength of the ringgit. The local currency is now the most undervalued currencies in the region. But it has done its part in alleviating earlier concerns regarding the trade balance. Stabilisation or perhaps some strengthening in the ringgit could well provide the impetus for Bank Negara to act.