BNM likely to keep OPR unchanged this week

A rate cut is unlikely as the GDP growth has beaten expectations in 2Q19


BANK Negara Malaysia (BNM) is expected to maintain the Overnight Policy Rate (OPR) at its present rate when its Monetary Policy Committee (MPC) meets tomorrow, since a cut was already made in May, economists said.

A rate cut is also unlikely as the GDP growth has beaten expectations in the second quarter of 2019 (2Q19).

The central bank is also expected to wait for the outcome of the US Federal Reserve’s (Fed) meeting later this month, on Sept 17-18.

The Fed slashed its rates in July — the first cut in a decade, prompted by trade tensions and slowing global growth.

“The better than expected export growth in July and higher GDP growth in 2Q19 would allow BNM to keep the policy rate unchanged,” Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told The Malaysian Reserve.

However, more importantly is BNM’s assessment on the economic outlook, he added.

“In view of the weakening global economy as indicated by the decline in global purchasing managers’ indices, as well as the US Treasury yield curve inversion, the case for a lower OPR is building up.

“The question now is the timing and quantum of the OPR cut,” Mohd Afzanizam said.

BNM cut Malaysia’s OPR by 25 basis points (bps) to 3% in May this year, in what was largely deemed a preemptive move, citing signs of tightening financial conditions amid a growing slowdown in domestic and global economic movement.

Although a second cut may not come this month, it is most likely to happen by end-2019, following a slew of recent rate cuts by Asian central banks in an attempt to lift economic activities amid escalating trade tensions and slowing global growth.

The next meeting of the MPC is scheduled for Nov 5.

A research note by Standard Chartered Bank Malaysia Bhd also predicts that BNM will leave the OPR on hold at 3% this week, as the central bank had already made a preemptive cut in May and “sounded neutral in July”.

“The re-starting of mega projects, resumption of natural gas production, still-resilient private consumption and an improvement in the residential property market will mitigate downside growth pressure, in our view,” the research note read.

It added that BNM would now have the room to calibrate its monetary policy response to any unexpected downside risks.

However, the central bank’s view on worsening trade tensions and domestic consumption should also be observed.

Malaysia’s exports climbed 1.7% year-on-year in July, as a result of healthy key shipments such as electrical and electronics, liquefied natural gas, refined petroleum, natural rubber, timber and timber-based products.

On the flip side, AmInvestment Bank Bhd noted that overall business sentiment has been weak and downside risk remains high, pointing towards a higher risk of potential cashflow issues.

Non-performing loans (NPLs) have also been on a gradual rising trend, with a 1.6% NPL ratio across the industry in June versus a low of 1.48% in March.

“Thus, we still believe a rate cut this week would augur well for the overall economic sentiment, and hence, maintain our 25bps rate cut view this week,” it said.

Last month, New Zealand’s central bank surprised investors with a 50bps cut in its official cash rate to a record low of 1%. Thailand then lowered its one-day repurchase rate by 25bps to 1.5%. India slashed its repo rate by 35bps to 5.4%.

Australia cut its rates in June and July to a record low of 1%, while Indonesia reduced rates in July and August. The Philippines lowered rates by a total of 50bps in May and August.