The adjustment is therefore intended to preserve the degree of monetary accommodativeness, says the central bank
By NG MIN SHEN / Pic By TMR File
Bank Negara Malaysia (BNM) has lowered the Overnight Policy Rate (OPR) to 3% from 3.25% previously, marking the first OPR cut in nearly three years amid downside risks to growth and potential squeezes in financial conditions.
The decision was made at the Monetary Policy Committee’s meeting yesterday, where the ceiling and floor rates of the corridor for the OPR were correspondingly reduced to 3.25% and 2.75% respectively, from 3.5% and 3% previously.
“While domestic monetary and financial conditions remain supportive of economic growth, there are some signs of tightening of financial conditions. The adjustment to the OPR is therefore intended to preserve the degree of monetary accommodativeness,” BNM said in a statement yesterday.
“This is consistent with the monetary policy stance of supporting a steady growth path amid price stability,” it added.
The move is not entirely unexpected, given the increasing signs of slowdown in global and domestic economic activities. Fourteen out of 23 economists surveyed by Bloomberg had guided for a 25-basis-point cut in the OPR.
United Overseas Bank (M) Bhd said in March it was expecting a cut as early as May as the US Federal Reserve’s dovish stance provided BNM with more flexibility to loosen monetary policy in support of growth, while Kenanga Investment Bank Bhd said the central bank’s toning down of inflation expectations was a strong indication of an OPR cut.
BNM said for Malaysia, the latest developments point towards moderate economic activity in the first quarter of 2019 (1Q19), with slowing global demand conditions and subdued growth of key trading partners going forward, which will continue to weigh on the external sector.
“The baseline projection is for the Malaysian economy to grow within the projected range of 4.3% to 4.8%. However, there are downside risks to growth from heightened uncertainties in the global and domestic environments, trade tensions and extended weakness in commodityrelated sectors,” BNM said.
Domestically, stable labour market conditions and capacity expansion in key sectors will continue to drive household and capital spending.
On the global front, underlying economic conditions continue to suggest moderation going forward, despite several major economies posting better than expected growth outcomes during 1Q19.
Considerable downside risks to global growth remain, stemming from unresolved trade tensions and prolonged country-specific weaknesses in the major economies, further dampening global trade and investment activities.
“Although the tightening in global financial conditions has eased somewhat, heightened policy uncertainties could lead to sharp financial market adjustments, further weighing on the overall outlook,” the monetary authority stated.
It expects inflation to remain low in the immediate term due to policy measures including the price ceiling on domestic retail fuel prices until mid-2019 and the impact of changes in consumption tax policy on headline inflation.
Headline inflation rose to 0.2% in March 2019 from -0.4% in February, mostly due to a less negative transport inflation of -3% versus -6.8% in February. Underlying inflation came in at 1.6% in March.
“For 2019 as a whole, average headline inflation is expected to be broadly stable compared to 2018. The trajectory of headline inflation will continue to be dependent on global oil prices. Underlying inflation is expected to remain stable, supported by the continuous expansion in economic activity and in the absence of strong demand pressures,” BNM said.
The central bank’s last move was to hike the OPR to 3.25% in January 2018 from 3% previously, in light of global and domestic economic conditions being ripe for a normalisation of domestic interest rates.
Yesterday’s OPR cut is the first reduction since July 2016, when BNM lowered the overnight interest rate to 3% from 3.25% in order to protect the country from global headwinds including Brexit.
Meanwhile, in a research note, OCBC Bank (M) Bhd noted that the rate slash is contrary to its expectation for a cut as early as July 2019.
“Currently, our forecast for headline inflation in 2019 stands at 1.3% year-on-year (YoY), but if the current price ceiling on domestic retail fuel prices stays in place for the rest of the year, we see that headline inflation may drop below 1% yYoY,” the research house said.
On GDP, OCBC is expecting a moderate growth for Malaysia with 1Q19 forecast at 4.4% YoY, while full year growth may grow 4.4%.