Things are going well for Malaysia. 2Q17GDP growth accelerated to 5.8% y-o-y, thefastest pace in two years, fuelled by private consumption and exports. While we expectsome deceleration in 2H17, momentum should hold up relatively well for the rest of theyear thanks in part to sustained activity in the electronics sector.    Inflationary pressures also continue to moderate, defying expectations that robustconsumption would lead to imminent demand-pull price pressures. CPI growth moderatedto 3.2% in July, still above BNM’s 2-3% comfort range, but we expect inflation todecelerate to 3.0% by year-end and then edge lower into the 2-3% range in 2018,assuming the continuation of a relatively benign oil price environment.    Taken together, we believe the above factors suggest there is no need to tweak monetarypolicy. In particular, the lack of demand-pull price pressures reduces the likelihood ofBNM tightening this year in response to stellar growth in 1H17. Moreover, the details ofthe manufacturing PMI suggest to us that input prices are likely to decelerate, despite anincrease in construction activity.    We expect BNM to keep both the Overnight Policy Rate (OPR) and statutory reserve ratio(SRR) on hold this week and for the rest of the year. Still, prices warrant close monitoringin our view and the possibility of another pro-consumer budget next year (should electionsnot be held by end-2017) implies resilient private consumption in the coming quarters.

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