Malaysia's GDP pegged to hit 5.5%

Government to keep policy rate at 3%.

According to DBS, full year GDP growth in 2013 is still likely to average 5.5%, almost unchanged from what it was last year(5.6%). Hence, from a growth perspective, there is little justification for a rate cut to boost growth.

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As it is, GDP growth in the final quarter of last yearsurged to 6.4% YoY, the strongest pace since 2Q10. While economic activity may ease in the first quarter given the drag from the externalfront, a 6% pace is expected, which is still remarkably healthy despite the challenging global outlook. 

Bank Negara policy meeting will convene this Thursday and no surprise is expected given the current economic conditions. The central bank is widelyexpected to keep its Overnight Policy Rate (OPR) at 3.00%, which isstriking a nice balance between growth and inflation.

Separately, inflation risk remains manageable. Latestfirst quarterinflation averagesjust 1.5% YoY. While inflation islikely to trend highertowardsthe end of the year and pressure forthe central bank to tighten may increase, the authority still have time to sit back and wait.

As long as the pick-up in inflation does not render the real policy rate negative, the central bank is more likely to stick to a stable monetary policy stance. Any risk of a rate hike will only surface in the second half, mostlikely towards the tail end of the year.