Bank Negara likely to ease in November, inflation likely to soften in coming months

Bank Negara Malaysia (BNM) is expected to ease its key interest rate at the monetary policy meeting in November with inflation likely to soften in the next 2-3 months and as growth concern intensifies.

Rising inflation is likely to post an impediment to the central bank to ease monetary policy further but a slowdown in growth momentum is another major concern. GDP growth has slowed amid the challenging external environment while the labor market is showing visible signs of softening. The Overnight Policy rate is expected to be reduced by 25 basis points in November, DBS reported.

Prime Minister Najib will announce the Budget for the fiscal year 2017 today. The theme for the upcoming budget is 'accelerating growth, fiscal prudence and enhancing the well-being of people'. Measures to spur domestic demand to counter the rising external headwinds are expected. Specifically, the aim is to boost private consumption and investment, while keeping a tight rein on the fiscal balance.

Developmental expenditure will be raised for FY17 with focus on utilities and transport infrastructure (i.e., high-speed rail and MRT). However, this will be balanced against necessary belt-tightening in its government operating expenditure so as to ensure that the fiscal target is met.

In addition, this could also be a people-centric budget given that election will be called within the next two years. More funding for affordable housing, higher BR1M payouts, and greater subsidies on healthcare and education can be expected.

Overall fiscal deficit target of 3.1 percent for FY16 is expected to be met while the target of 3.0 percent for FY17 will rest upon gradual improvement in oil prices and better revenue collections due to the GST. However, the slowdown in growth and its potential impact on income and corporate tax collections may be a concern, the report also added.