BNM has more flexibility to cut OPR by 25bps


Bank Negara Malaysia (BNM) has more flexibility to cut its Overnight Policy Rate (OPR) by 25 basis points (bps) now due to lower inflation rate estimates and dovish stance of major central banks, said Kenanga Investment Bank Bhd (Kenanga Research).

“We believe that inflation would likely hit the lower end of our forecast range of 1%-1.5% in 2019 (2018: 1%).

“As such, coupled with dovish stance of major central banks (for example the US Federal Reserve and European Central Bank) and a growing number of regional central banks, we believe that BNM now has a bigger leeway to cut its OPR by 25bps, possibly at its next Monetary Policy Committee (MPC) meeting on May 7,” the investment bank stated in a report yesterday.

It foresees that the floating of domestic fuel prices, slated for July, and low base effect arising from the tax holiday period from June to August 2018 to technically lift up year-on-year (YoY) inflation in the second half of 2019 (2H19).

However, Kenanga Research expects any upside would be limited largely due to heightened risks emanating from the external front, namely the slowdown in global growth and the ongoing trade dispute between China, the US and potentially the European Union.

It said these may spill over to the domestic front, seeping through as a hindrance to economic activity.

Malaysia’s inflation rate, as measured by the Consumer Price Index (CPI), rose 0.2% YoY in March 2019 to 121.1 from 120.9 a year ago.

The Department of Statistics Malaysia chief statistician Datuk Seri Dr Mohd Uzir Mahidin said in a statement on Wednesday that the increase in the overall index was driven by the index of housing, water, electricity, gas and other fuels (+2%), education (+1.3%), food and non-alcoholic beverages (+1.1%), and restaurant and hotels (+1%).

On a monthly basis, CPI increased 0.2% compared to February 2019. It was mainly supported by the indexes of transport (+2.6%), miscellaneous goods and services (+0.4%), and furnishing, household equipment and routine household maintenance (+0.3%).

The CPI in the first quarter of 2019 (1Q19) recorded a decline of 0.3% to 120.8 compared to 121.2 in the same quarter last year, contributed by transport (-5.9%), clothing and footwear (-3.1%),  miscellaneous goods and services (-2.2%), and communication (-1.2%).

Kenanga Research said the inflationary pressure remained muted in 1Q19 with the index down by 0.3% YoY (4Q18: +0.3%), reflective of the changes in retail oil pricing mechanism at the start of 2019, as well as the lack of demand-pull pressure.

In the next few months, Kenanga Research expects inflationary pressure will gradually pick up, driven by firmer global oil prices, especially following the announcement of the US decision to terminate sanction waivers for major importers of Iranian oil effective May 2.