Economists are assuming a 25bps rate cut if growth softens as BNM might retain a dovish bias and trim further

By SHAHEERA AZNAM SHAH & SHAZNI ONG / Pic By RAZAK GHAZALI

BANK Negara Malaysia’s (BNM) focus on sustaining economic growth momentum could lead it to cut the Overnight Policy Rate (OPR) by at least 25 basis points (bps) in the first half of the year (1H20), should the economy show signs of slowing amid trade and geopolitical factors, economists said.

The central bank last lowered the OPR by 25bps in May 2019 on signs of tightening financial conditions.

“BNM is clearly in a wait-and-see mode. They have room to cut if the growth softens. BNM has room to be accommodative,” OCBC Banking Corp Ltd chief economist and head of treasury research and strategy Selena Ling (picture) said at a press conference on the economic outlook in Kuala Lumpur yesterday.

“We assume a good chance of one 25bps rate cut in 1H20. BNM might retain a dovish bias and trim further, should the global economy fail to turn supportive to the export sector,” she said.

Similarly, Standard Chartered Bank (M) Bhd (StanChart) also sees risk of a 25bps rate reduction in 2020.

“Despite the expected rise in inflation in 2020, BNM is likely to maintain its focus on growth, which has been slowing on a sequential basis since the fourth quarter of 2018 (4Q18).

“The risk to our status-quo call is a deterioration in domestic sentiment, which would risk pushing GDP growth into the low -4% range,” StanChart chief economist for Asean and South Asia Edward Lee said at a separate media briefing in Kuala Lumpur yesterday.

The national target of 4.8% GDP growth this year is a tough order assuming things fall into place, without further escalations in the US-China trade dispute, Ling added.

“If any of the puzzle pieces do not fall into place, there is a risk of slippage and it applies to all Asian countries. Thus, the forecast is a bit challenging to achieve,” she said.

OCBC is projecting the GDP to expand between 4.2% and 4.4% in 2020.

Lee expects GDP to grow at 4.5% this year with private consumption remaining the key driver.

Overall, investments may recover slightly this year amid the trade war de-escalation and the resumption of public infrastructure projects.

The ringgit is set to strengthen this year, trading between RM4 and RM4.1 against the US dollar versus the RM4.1 to RM4.2 range last year.

“We have turned more positive on the ringgit. We are looking at RM4.05/US dollar in 2H20 and RM4/US dollar in 1Q21,” StanChart head of Asean and South Asia foreign-exchange research Divya Devesh said.

The bullish projection is mainly on improvement in Malaysia’s external balances, although the ringgit has not yet rallied to reflect this improvement.

“We think the divergence gap, involving trade and the ringgit, will close as we go through this year, which is why we are expecting a stronger ringgit,” Divya said.