Another 25bps OPR cut next month appears imminent, say analysts

A further rate cut may be able to spur consumer spending amid the MCO and social distancing measures

By ASILA JALIL

BANK Negara Malaysia (BNM) is expected to slash the Overnight Policy Rate (OPR) by at least another 25 basis points (bps) next month, following the uncertain economic outlook in the country due to the Covid-19 outbreak.

BNM’s Monetary Policy Committee (MPC) is scheduled to meet on May 5. The central bank has already made two 25bps cuts this year, bringing the benchmark lending rate to 2.5% in March in light of weak global economic and financial conditions.

MIDF Amanah Investment Bank Bhd senior analyst Imran Yassin Mohd Yusof predicts another total reduction of 50bps in the OPR this year, which could take place at once in May or over two meetings with a 25bps cut each time.

He said a rate cut usually would be able to spur consumer spending, however, the Movement Control Order (MCO), which has been enforced nationwide since March 18, may have prohibited consumers from spending in the traditional manner.

Consumer sentiment will also be hit by the economic fallout caused by the MCO.

“Nevertheless, we believe it will help in terms of providing a slight boost,” Imran Yassin told The Malaysian Reserve (TMR).

The MCO, which was implemented to curb the spread of Covid-19, has been extended for another two weeks until May 12. The third phase of the MCO was scheduled to end tomorrow.

Banks will bear the brunt of the further OPR cut, with net interest income to ease as net interest margins (NIM) compress.

“We believe it will be more moderate this time around as we have observed the competition for deposits has waned, since December last year. Therefore, banks may not have aggressively accumulated fixed deposits,” Imran said.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid also expects a 25bps OPR cut in May and another 25bps cut in July, when the MPC is scheduled to meet again.

A compression in NIM will be the immediate impact on banks, although this will normalise when fixed deposit rates are reset to the prevailing rate once deposits mature.

“Lower rates may entice consumers and businesses to refinance their existing borrowings. They can save some interest costs and possibly get some cash along the way,” he told TMR, adding this will allow banks to grow their financing and maturity of assets.

As the MCO and social distancing measures have resulted in limited everyday movement, Mohd Afzanizam said economic activities may not occur as per normal.

“Nonetheless, consumers would shift their spending behaviour through online means. They can buy food, clothes, electrical equipment, etc, via online platforms,” he said.

The need for further monetary policy accommodation by BNM remains following the uncertain global outlook and economic challenges, said OCBC Bank (M) Bhd economist Wellian Wiranto.

The bank, however, only sees a 35% chance of a 25bp OPR cut next month.

“As we delve deeper, the suspended monetary policy transmission mechanism, due to the six-month loans moratorium, may tip the balance towards a ‘Hold’ on policy rate for now.

“Given that most of the loans are serviced right now, there is going to be a limited pass-through from any policy rate cut,” Wiranto told TMR.

Any effect of a possible rate cut is relatively muted for now since individuals, small and medium enterprises, and several corporations are not paying interest in the interim period, he added.

This is unlike normal times where these parties would be able to enjoy rate cuts that would have reduced their monthly loan payments.

“On balance, it appears BNM may preserve their ammunition for the remainder of the year rather than undertake the cut right now,” Wiranto said.

AmInvestment Bank Bhd predicts a 25bps cut in May, although it also sees a 40% chance of a 50bps cut as the potential incoming data for March and April will be worse than February’s.

Headline inflation should average at around 0.3% this year, with room to fall into deflation at -1.5%, which would be the first time since 1983, it wrote in a recent note.

Malaysia’s inflation fell by 0.2% in March due to lower transport costs as a result of global oil prices falling to multi-year lows. The inflation rate last declined in February 2019 by 0.4%.

“There is not much cost pressure, partly due to weak commodity prices, added with an economy that is plagued with excess capacity,” AmInvestment said, adding that demand is set to be weak due to rising job losses and Covid-19- induced loss of income.

Affin Hwang Investment Bank Bhd projects the OPR will be reduced by between 25bps and 50bps in May, while CGS-CIMB Securities Sdn Bhd expects two OPR cuts this year, 50bps in May and 25bps in the second half of 2020.

The OPR was slashed by 25bps to 2.5% in March as a preemptive action against the Covid-19 outbreak, bringing the OPR level to its lowest since 2010.