BNM keeps OPR at 3%, external headwinds weigh on growth prospects

The central bank is taking a cautious approach in an uncertain global economic environment


BANK Negara Malaysia (BNM) has maintained the Overnight Policy Rate (OPR) at 3%, after the central bank cut the rate by 25 basis points (bps) at the previous meeting of its Monetary Policy Committee (MPC) in May this year.

Economists said the central bank is taking a cautious approach in an uncertain global economic environment.

In a statement yesterday, BNM said the country’s economic growth came in “within expectations” for the first quarter of the year and is expected to remain in positive territory, hence the baseline projection remains between 4.3% and 4.8%.

“This projection, however, is subject to downside risks from ongoing uncertainties in the global and domestic environment, worsening trade tensions and extended weakness in commodity-related sectors,” it said.

Headline inflation, which has remained low of late, is projected to rise in the coming months as the impact of the changes in consumption tax policy lapses. The trajectory will depend on global oil prices and policy measures such as the timing of the lifting of the domestic retail fuel price ceiling.

On the external front, the global economy continues to grow moderately on firm labour conditions in advanced economies and strong domestic demand in Asia.

“Leading indicators, however, point to a softening of the near term global economic outlook, with considerable downside risks remaining primarily from prolonged trade tensions.

“While the prospects of monetary easing in the major economies have somewhat eased global financial conditions, heightened policy uncertainty could lead to excessive financial market volatility,” BNM warned.

The central bank said at the current level of the OPR, the stance of monetary policy remains “accommodative and supportive of economic activity”.

The MPC will continue to assess the balance of risks to domestic growth and inflation, to ensure that the monetary policy stance remains conducive to sustainable growth amid price stability,” it added.

The decision to keep the OPR unchanged is “very much in line with what the market expected”, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid (picture) said.

“Nonetheless, the tone in the accompanying statement was very cautious, especially on the global growth outlook,” Afzanizam told The Malaysian Reserve.

He also expects the inflation rate to be contained this year, although this hinges upon the rollout of the new targeted fuel subsidy. Malaysia’s annual inflation for May was unchanged at 0.2% for the third month in a row.

“All in all, the window to prescribe an additional OPR cut is wide open as growth prospects have been gradually challenging and the inflation rate is likely to be well below its trend level,” he said.

However, the recent data point on export growth surpassed the median estimate, suggesting there is no hurry to reduce the OPR.

“Plus, the central bank would want to wait for the outcome of FTSE Russell’s review of the World Government Bond Index in September, on whether our bonds will remain in the index. So for now, it’s status quo,” Mohd Afzanizam added.

BNM’s decision yesterday was predicted by 25 of the 28 economists surveyed by Bloomberg, while the other three had primed for a 25bps cut. Capital Economics Ltd said in a report it expects another 25bps cut this year — likely in September, as it doubts Malaysia’s economic resilience will last.

RHB Investment Bank Bhd in a report yesterday stated it expects no further cuts in the OPR for the remainder of 2019, but believes the worsening global trade outlook will weigh on Malaysia’s external trade and dampen economic growth next year, increasing downside risks on interest rates.

Consequently, RHB does not rule out BNM lowering interest rates by another 25bps to 2.75%, bringing the policy rate to its lowest in nine years.