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Industrial production in Malaysia expanded during the month of May, giving enough reason to Bank Negara to remain on hold in the Wednesday's meeting. However, it remained well above of what the markets had expected. Such resilient industrial production will surely convince policymakers to keep monetary policy stable despite the prospects of slower growth ahead.
Industrial output for May expanded 2.7 percent y/y. Though this is a marginal decrease from 3.0 percent in the previous month, it beats market expectation of 2.5 percent. While the mining sector has back-pedaled, the electricity generation and manufacturing clusters continued to power ahead with healthy growth of 9.6 percent and 3.6 percent respectively.
Moreover, overall gross domestic product is likely to register just 4.2 percent, down from 5.0 percent last year. This remains within the policy target range of 4.0 to 4.5 percent by the central bank. Moreover, consumer inflation has been easing at a steady pace. The headline number will likely fall below the 2 percent level in the coming months before inching higher to average 2.4 percent in 2017. In terms of growth and inflation, the risks on both ends are well balanced, DBS reported.
Meanwhile, external balances are improving. Though trade balance for May surprised on the downside with a surplus of MYR 3.3 billion registered, down from MYR 9.1 billion in the previous month, the overall trade surplus for the first five months of the year recorded a healthy MYR 36.3 billion. This is an expansion of 7.5 percent compared to the same period last year.
However, markets will wait to watch the decision of Bank Negara on Wednesday. Though there is room for a marginally lower policy rate, there is little pressure for the central bank to act. In addition, the authority will have to stay vigilant against the rising consumer leverages, the report added.
"A stable monetary policy is probably the best option for policymakers given the current economic conditions," DBS commented in its report.
