BNM expected to keep OPR unchanged at MPC meeting


BANK Negara Malaysia’s (BNM) Monetary Policy Committee, which meets today, is likely to keep the Overnight Policy Rate (OPR) unchanged at 3% after slashing the rate by 25 basis points (bps) at its previous meeting in May.

Standard Chartered Bank Malaysia Bhd (StanChart), in a research note yesterday, stated the central bank’s last monetary policy statement indicated a neutral policy stance, adding that the rate cut in May was intended to address some signs of financial conditions tightening rather than any significant growth deterioration or fall in inflation.

“While downside risks to growth remain, we think the May cut was preemptive and we expect the central bank to remain watchful. We expect growth to remain above 4.5% in 2019.

Core inflation excluding the tax changes effect was stable at circa 1.6% in May,” the bank’s global research report said.

BNM’s OPR cut two months ago was the first reduction since July 2016, when the monetary authority lowered the overnight interest rate to 3% from 3.25% to protect the country from global headwinds including Brexit.

Prior to the cut, BNM’s last move was to hike the OPR to 3.25% in January last year from 3% previously, in light of global and domestic economic conditions being ripe for a normalisation of domestic interest rates.

StanChart said monetary conditions have loosened in the country, according to the Monetary Conditions Index.

“The policy rate cut, a weaker real effective exchange rate and a slight improvement in money-supply growth have contributed to looser conditions,” the research house said.

A total of 21 out of 24 economists surveyed by Bloomberg are expecting no change in the benchmark rate today, while three have forecast a 25bps cut.

However, expectations are mounting for another rate cut in 2019 amid weak export data and mild inflation.

Malaysia’s exports climbed 2.5% year-on-year in May 2019, below expectations, as exports of manufactured goods to China fell. Annual inflation for May was unchanged at 0.2% for the third month in a row.

The central bank’s next move will depend on whether the US Federal Reserve (Fed) decides to lower interest rates this year. The Fed’s next meeting is scheduled for the end of this month.

Meanwhile, United Overseas Bank (M) Bhd (UOB) in a report yesterday stated the bias for lower rates in the US, Europe and Japan has helped the local equity and bond markets recover investors’ hunt for yields in June.

“Foreign flows into Malaysian bonds increased by RM6.6 billion and equities rose RM135 million in June. However, net flows remained negative in the second quarter of 2019, with net outflows of RM7.4 billion from bonds and net outflows of RM3.3 billion from equities,” UOB said.

Local bonds reversed two months of net outflows, with Malaysian Government Securities (MGS) seeing inflows of RM5.8 billion in June versus an outflow of RM3.8 billion in May, while Treasury bills added RM900 million after losing RM10 million in May.

Government Investment Issues (GII) and private debt securities registered net outflows of RM10 million and RM60 million respectively.

Foreign holdings of Malaysian government bonds — MGS and GII — rose for the first time in two months to RM164 billion or 21.5% of total outstanding in June.

Note that foreign investors sold RM2.69 billion of domestic bonds over the first five months of 2019, bringing foreign shareholding of Malaysian bonds to their lowest since 2011, according to Bloomberg.

In the equities market, foreign funds turned net buyers last month after selling RM2 billion worth of stocks in May.

This follows four straight months of net selling, bringing year-to-date foreign equity outflows to RM4.7 billion.