The latest economic data for Malaysia were mixed. Wholesale trade and domestic-oriented manufacturing production for July were resilient, consistent with the positive industrial production growth. However, the external sector remained weak as the latest exports for August fell at a steeper pace of 18.6% (July: -13.0%), dragged by softer demand from key trade partners. Going forward, we envisage exports to see some improvements as early as 4Q2023 on the back of a stabilisation in China’s economy, continued US growth and higher crude oil price.

With the recent inflation under control, Bank Negara Malaysia (BNM) maintained the overnight policy rate (OPR) at 3.00%, as expected. Removing the phrase “slightly accommodative” from the monetary policy statement may imply that the current interest rate level is appropriate. While domestic spending is expected to hold up well, we remain watchful of how the weaker external environment could potentially impact consumer sentiment in the near term.

Following the reversal of a brief uptick, the ringgit notably weakened further to 4.70 towards the end of September against a firmer greenback. The dollar index continued its rally against major currencies, driven by signs of US economic outperformance. Net foreign flows in the local bond market turned negative for the first time this year as foreign investors tracked the depreciating ringgit.

Growing risk-off sentiment ahead of the Federal Reserve meeting had put upward pressure on local bond yields. The perceived hawkish pause resulted in the bear-steepening of the US Treasuries yield curve, driven by the speculation of a prolonged period of elevated rates and fear of sticky inflation ahead. For now, the local bond market remains anchored on expected stability in Malaysia’s policy interest rate, despite expectations of higher rates in the US and Europe.

We maintain our 2023 inflation forecast of 2.8% but upside risks include food-related inflation, fuel and transport-related costs, and the weaker ringgit. In view of this, BNM is likely to maintain the OPR at 3.00% for the rest of the year. Overall, tighter monetary conditions and a challenging external environment could constrain domestic growth ahead. For now, we maintain our forecast for full-year 2023 GDP growth at 4.2% (2022: 8.7%).