KUALA LUMPUR (Nov 7): DBS Bank Ltd has raised its forecast of Malaysia’s economic growth to 5% in 2018, from previous forecast of 4.6%, ahead of the Bank Negara Malaysia (BNM)’s monetary policy committee meeting on Thursday.

“The stimulant effects from the expansionary fiscal policy, as well as a pre-election spike in consumption could further buttress domestic growth,” DBS’ senior economist Irvin Seah and strategist Eugene Leow wrote in a note to clients.

DBS added that simultaneously, the government’s announcement of a generous budget ahead of the 14th general election — juxtaposed with an increasingly positive global outlook — will continue to support Malaysia’s export performance.

DBS’ higher forecast is in tandem with the recent estimate by the Ministry of Finance (MOF).

In the latest Economic Report 2017/2018, MOF has raised its forecast economic growth to come in between 5.2% and 5.7% in 2017, higher than its previous estimate of between 4.3% and 4.8%.

“Growth momentum is expected to strengthen, which will likely stoke inflationary pressure, going forward”, lifting Malaysia’s inflation forecast to 3.3% in 2018, from its earlier forecast of 2.5%, DBS added

Once the monetary policy meeting concludes on Thursday, DBS said it expects the central bank to keep the overnight policy rate (OPR) unchanged at 3%, a level maintained since it was trimmed by 25 basis points (bps) in July 2016.

“The data flow has been indicating strong growth but modest inflation, which leaves BNM in a comfort zone,” the two DBS analysts added.

While the country’s monetary policy has remained accommodative, DBS expects the central bank to commence a tightening bias from the second half of 2018.

“We expect two rate hikes of 25bps each in 3Q18 and 4Q18, which will bring OPR to 3.5% by the end of 2018,” DBS analysts added, noting the central bank would be compelled to act on expected mounting pressure on currency and inflation.

DBS said the expected hike in the interest rate is on anticipation of stronger growth momentum and higher inflationary pressure.
 
In addition, DBS said the probable OPR hike is also on anticipation that the US Federal Reserve Systems will increase the rates by another 100bps towards the end of 2018.