More economists warn of OPR cut soon

OPR has been unchanged for 7 consecutive MPC meetings, since BNM last hiked the rate in 2018

by NG MIN SHEN / pic by MUHD AMIN NAHARUL

THE case for a reduction in the Overnight Policy Rate (OPR) is growing stronger, as more economists are guiding for a cut ahead of the next meeting of Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) on May 7.

The OPR has been unchanged for seven consecutive MPC meetings, since BNM last hiked the rate by 25 basis points (bps) in January 2018 to 3.25% from 3%.

While the central bank still expects the domestic economy to remain on a steady growth path, it has in recent months warned of increasing downside risks to growth from the ongoing trade tensions, a slowdown in global growth and prolonged weakness in commodity-related sectors.

United Overseas Bank (M) Bhd said in a note yesterday that it expects a 25bps reduction in the OPR to 3% as early as May this year, in view of the higher downside risks to growth.

“Given that we no longer expect any more rate hikes from the US Federal Reserve (Fed) in this cycle, this provides BNM with more flexibility to loosen monetary policy to support growth,” it said.

Hong Leong Investment Bank Bhd also said it sees risks of a potential OPR cut and muted capital market activities, hence, the research firm is retaining a ‘Neutral’ call on the domestic banking sector.

While economists previously suggested that the rate would be slashed at the MPC’s meeting in July, some are now predicting for an earlier reduction given the state of global financial and economic conditions.

The Fed’s stance has turned dovish in recent times, leading to speculation that central banks worldwide will soon follow suit.

Along with last week’s inversion of the US Treasury yield curve — the US bond market’s clearest sign of recession, last seen during the financial crisis in 2008 — there seems to be plenty of reasons for BNM to lower domestic rates in order to safeguard the economy.

CIMB Investment Bank Bhd (CIMB Research) said lowering the OPR by 25bps may be a short-term positive for the market from a sentiment point of view, but would narrow banks’ margins and dampen earnings for selected corporates.

It said the downward re-pricing of lending rates has in the past been wider than the decrease in deposit rates, leading to a potential compression in banks’ net interest margins (NIMs).

Slashing the OPR would also be negative for companies with high net cash balances as the move would result in lower interest income.

“It is likely to be negative for overall FTSE Bursa Malaysia KLCI (FBM KLCI) earnings, as the impact from the NIM squeeze on banks appears to be higher than potential interest savings for FBM KLCI constituent companies.

“This is because the net gearing of FBM KLCI constituent companies (excluding banks) is only around 31%, and roughly 55% of their borrowings are denominated in foreign currencies,” CIMB Research said in a report on Wednesday.

The central bank has guided for Malaysia’s GDP to grow between 4.3% and 4.8% in 2019, versus the Ministry of Finance’s (MoF) projection of 4.9%.

Key headwinds to growth include a weakening global outlook, potential commodity-related supply disruptions, unresolved trade tensions and softer business sentiment.

Headline inflation is expected to range between 0.7% and 1.7% this year versus 1% in 2018, lower than the MoF’s forecast of 2.5% to 3.5%.

Meanwhile, MIDF Amanah Investment Bank Bhd (MIDF Research) does not foresee any OPR reduction this year, as it sees the domestic economy continuing on a strong path as per BNM’s projections.

“Based on the forecast figures and Malaysia’s economic outlook, we maintain our stance of no change in the monetary policy rate in 2019,” it said an economic brief yesterday.

BNM is anticipating Malaysia’s GDP growth to be supported by recovery in commodity-based sectors, solid domestic demand and a pick-up in private investment.

The agriculture and mining sectors are expected to rebound this year at 2.8% and 0.8% respectively, from contractions recorded in 2018 of -0.4% and -1.5% respectively, while private investment is expected to improve to 4.9% from 4.5%.

Despite global trade uncertainties, the central bank has forecast exports will increase 3.4% this year, compared to MIDF Research’s prediction of 3.6%.

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