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Malaysia: Bank Negara set to retain key interest rate
PETALING JAYA: Bank Negara is expected to maintain the benchmark interest rate at 3.00% at its Monetary Policy Committee (MPC) meeting today although there is mounting pressure for a further rate cut later this year.
According to economists, the central bank would maintain the existing key benchmark rate for now, but would need to assess the macroeconomic conditions and uncertainties and how it would impact the local economy.
In its last MPC meeting in May, the central bank decided to reduce the overnight policy rate (OPR) to 3.00% from 3.25%. The OPR was last cut in July 2016 to 3.00%, following the Brexit vote in the UK.
Twenty-one of 24 economists surveyed by Bloomberg expect Bank Negara to keep the benchmark rate unchanged today, while three have forecast a 25-basis-point (bps) cut.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid told StarBiz that “I think the decision by the central bank on the OPR would be very much in line with median estimates, whereby it would be maintained at 3%.
“What is more important is the bank’s assessment of the state of the Malaysian economy in the second half of this year, especially since the global Purchasing Managers’ Index for the manufacturing sector has been below 50 points for two consecutive months amidst the backdrop of heightened uncertainties on the trade war, Brexit and crude oil prices.
“We believe the window to deliver another round of OPR cut is widely open, as the inflation rate is expected to be below 1% this year. Apart from that, the economy is currently operating below potential, and therefore, any economic stimulus from the authorities, be it monetary or fiscal, is highly welcome.
“Our sense is that the central bank would want to cut the rates further, but the upcoming FTSE Russell review in September could pose a challenge to the ringgit. So, for now, it’s status quo,” he said.
Recall that In April, FTSE Russell said it would review the nation’s government bonds’ participation in the World Government Bond Index (WGBI) due to market liquidity issues. It has placed Malaysia on its fixed-income watch list for six months until September.
AmBank Group chief economist Anthony Dass, who is maintaining the 3% OPR stance, added that following the 25-bps cut in May, the impact on the economy has been positive with improved lending data.
Hence, there is no real urgency for another rate cut in the form of a back-to-back action, he noted.
It is likely that Bank Negara would remain vigilant with its monetary policy with the aim to support growth, and at the same time, ensure price as well as currency stability. Besides, ongoing global uncertainties still remain, Dass said.
“Room for a potential rate cut in the remaining months of 2019 is still on my plate. The possibility of another 25-bps cut could happen should the potential underlying macro figures take a dip such as inflation, growth and lending.
“Also, if the global downside risks flare up with increasing monetary easing taking place, it further opens the door to a rate cut to take place to ensure interest rate differentials do not widen too much and put us in an awkward position. At this point, the probability of another rate cut happening in the fourth quarter is about only 40%,” he said.
Dass said that inflation is expected to stay tame in 2019, at around 1%. There is limited pressure coming from the underlying inflation, telling us that demand-driven inflation is still tame, he said. Any upward spike to inflation, according to Dass, is more likely to be fueled by cost-driven factors.
Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said the central bank is expected to keep the policy steady at 3.00%, allowing it to assess the impact of the previous rate cut.
“It will reserve the monetary arsenal to mitigate further shocks down the road. For now, we expect the OPR will remain unchanged at the current level. SERC maintains this year’s gross domestic product (GDP) growth estimate at 4.5%-4.7%, with GDP growing at between 4.6%-4.7% in the second quarter,” he said.
The country’s GDP growth in the first quarter performed better than expected at 4.5% year-on-year (y-o-y) from 4.7% y-o-y in the fourth quarter of 2018.
Headline inflation, though, would pick up in the second half of the year due to the lapse of the consumption tax, soda tax and other cost factors. Lee said it would remain moderate at between 1.0% and 1.5% this year.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said there is a high likelihood that the OPR would be maintained at the current rate and the move by the central bank would be data dependent, going forward, and not a pre-emptive one.
“Global economic uncertainties, if prevailing, will have a knock-on effect on Asian economies. This could affect the macro performance of most countries, including Malaysia.
“Our base case forecast for the OPR for 2019 is 3%. However, if GDP growth weakens more than expected, there is a chance of another rate cut this year (by 25 bps). We still maintain our real GDP growth forecast at 4.6% for 2019.
“Inflation will not be an issue this year as economic growth moderates and takes the pressure off the consumer price. We concur with Bank Negara’s projection of an average inflation rate of between 0.7% and 1.7% for 2019,” Nor Zahidi said.
Meanwhile, Maybank IB Research in a note early this month said its baseline expectation is for OPR to stay at 3.00% for the rest of the year.
However, the research house is not ruling out another 25-bps OPR cut if downside risk to growth from the trade tension persists and/or worsens, considering that the recent OPR cut was “event-driven” in reaction to the negative development on the US-China trade situation.
“At the same time, we do not see the central bank making any move until up to September 2019, pending the announcement by FTSE Russell on Malaysia’s status in the WGBI,” it noted.
Source: https://www.thestar.com.my/business/business-news/2019/07/09/bank-negara-set-to-retain-key-interest-rate/#qqtJRemE3ulI59ZQ.99