PETALING JAYA: The country’s key interest rate could be cut in the next four months, considering Bank Negara’s more cautious tone on the Malaysian economy recently, says AmBank Research.

The research firm said in a note it expected the central bank’s Monetary Policy Committee (MPC) to slash the benchmark overnight policy rate (OPR) by 25 basis points (bps) to 3% during the committee’s next meeting in July this year.

A lower OPR would translate into cheaper borrowing costs, benefitting domestic households and businesses.

However, such a move would also signal reducing confidence in the economic growth, as OPR cuts are traditionally regarded as the monetary authority’s strategy to boost the otherwise slowing private-sector activities.

Following its recent meeting on March 5, the MPC kept the OPR unchanged at 3.25%. For context, the benchmark rate has remained unchanged for the seventh consecutive meeting after the 25-bps hike back in January 2018.

The decision to retain the OPR as announced in the recent monetary policy statement was well within economists’ expectations.

However, in comparison to Bank Negara’s previous monetary policy statements (MPS) in recent times, the central bank’s tone on future economic growth in the latest MPS has noticeably turned more cautious.

While it pointed out that the baseline forecast is for the Malaysian economy to remain on a steady growth path, the central bank has hinted that the risk to growth has tilted more to the downside.

“The materialisation of downside risks from unresolved trade tensions, heightened uncertainties in the global and domestic environment and prolonged weakness in the commodity-related sectors could further weigh on growth,” stated Bank Negara in the MPS.

“With Bank Negara having acknowledged the downside risks in the economic and financial environment, and the need to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation, it supports our view for a rate cut to most likely take place during the July 9 MPC meeting rather than the May 7 MPC meeting by 25 bps, after taking into account some recent anecdotal evidence of the macro figures that revealed a weak trend,” AmBank Research said in its note.

On the other hand, other analysts have dismissed the possibility of an OPR cut in 2019 by Bank Negara.

Kenanga Research said the probability of a rate cut remained low, despite the threat of a potential downturn ahead.

Last month, the research house revised its 2019 gross domestic product growth forecast downward to 4.5% from 4.7% to reflect the rising uncertainties in the economy.

Nonetheless, the government remains confident that the country can achieve a higher growth target of 4.9% in 2019 from 4.7% in 2018.

“With a fair warning that the global economy is slowing and a dovish US Federal Reserve, this may provide justification apart from creating ample room for a rate cut.

“At this juncture, we do not see the need for Bank Negara to do so, lest it triggers a bigger capital outflow and unnecessarily weakens the ringgit,” it said.

The research house added that the OPR is expected to remain at 3.25% in 2019, barring a major external shock.

Sharing a similar stance, Maybank Investment Bank Research has also rejected any possibility of a change in the OPR this year. It also believes that the country’s price pressure would have less impact on the key interest rate.

“Inflation is less of a factor on the OPR in our opinion, given the ‘noisy’ inflation over the past few years, mainly due to the impact of policy changes on the consumption tax regime and fuel price subsidy/floating fuel price mechanism,” it said.

Bank Negara expects the country’s average headline inflation in 2019 to be broadly stable compared to 2018. Last year, the headline inflation averaged at 1% as compared to 3.7% in 2017.

Source: https://www.thestar.com.my/business/business-news/2019/03/07/bank-negara-may-lower-rate-in-july/#vE0pbkayrqHmxWC1.99