OPR expected to remain at 2% for now

Another reduction will push the benchmark rate to 1.75%, lower than the level seen during the 2009’s GFC


BANK Negara Malaysia (BNM) is expected to keep the Overnight Policy Rate (OPR) at 2% when it meets on July 7, as it evaluates monetary and fiscal stimulus measures that have been rolled out to mitigate the impact of the Covid-19 pandemic on the economy.

To date, the central bank has reduced the benchmark lending rate by 100 basis points (bps) for the year, with the latest being a 50bps rate cut in May.

BNM last cut the OPR by 50bps in February 2009, when the economy was suffering from the impact of the global financial crisis (GFC).

Analysts believe BNM’s Monetary Policy Committee is unlikely to alter the benchmark rate this month as the economy is showing signs of a slow recovery despite weak economic growth expectations for the second quarter (2Q20) due to Malaysia’s Movement Control Order (MCO), OCBC Bank (M) Bhd economist Wellian Wiranto said.

“The IHS Markit Ltd’s Malaysia manufacturing Purchasing Managers’ Index (PMI) for May, for instance, saw a marked improvement from the previous month. Though it stayed below 50, it has nevertheless shown signs of bottoming out,” he told The Malaysian Reserve (TMR).

“Judging from the more high-frequency indicators such as the Apple Mobility report which collates driving direction requests, Malaysia has also regained about 90% of its mobility compared to early March which signals a recovery in economic activities.”

The IHS Markit’s PMI, an indicator of manufacturing performance, jumped to 45.6 in May from a record low of 31.3 in April on strong external demand as many countries began easing lockdown measures.

Malaysia has begun lifting restrictions since June with the introduction of the Recovery MCO, nearly three months after implementing the MCO on March 18 and subsequently a more relaxed version known as the Conditional MCO.

Because of MCO, economic growth slumped to 0.7% in 1Q20, the lowest since the GFC in 3Q09. BNM is projecting GDP to contract sharply in 2Q20 as the economy takes a hit from the MCO.

Wiranto believes BNM will not hesitate to slash the OPR further should the indicators show growth shrinking despite the easing of the MCO.

“For now, BNM has some space to wait a bit more,” he said. The central bank’s next meeting to decide on the OPR is slated for July 7.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid also expects the central bank to maintain the OPR at 2% to assess the effectiveness of government measures in reviving the economy.

“BNM will not need to provide excessive monetary stimulus if the reopening of the economy leads to positive growth in the second half of the year (2H20),” he told TMR.

“They will always weigh the pros and cons of a lower interest rate regime. Certainly, BNM does not want to be like their counterparts in developed countries whereby their benchmark interest rate is already zero-bound.”

Conversely, MIDF Amanah Investment Bank Bhd economist Mazlina Abdul Rahman is projecting another 25bps rate cut this year, as early as this month.

“In 2H20, the economy is expected to gradually recover buoyed by the easing of movement restrictions both domestically and externally. A combination of both monetary and fiscal policies will expedite the economic recovery,” she told TMR.

Slashing the OPR further would enable an economic recovery as it reduces the burden on homeowners and businesses, she said.

Lower interest rates would also encourage borrowing and investing due to lower financing cost while boosting disposable income as household loan commitments ease.

Another reduction would push the benchmark rate to 1.75%, lower than the level seen during the GFC, reflecting expectations for worse economic conditions than the last crisis.

“Since the US’ interest rate was maintained at low zero to 0.25% levels, we believe BNM has ample room to engage another 25bps cut. The low inflation environment would also be conducive for an OPR cut. We now expect headline inflation to average -0.5% for a full year, down from our previous forecast of 0.5%,” Mazlina said.

MIDF Amanah projects Malaysia’s GDP to contract -2.1% in 2020. The central bank in April stated the economy could shrink as much as -2% or grow by 0.5% this year.