Growing consensus on another OPR cut by year-end

The sharp magnitude of 2Q20 GDP hit and still uncertain global outlook in 2H20 would warrant another ‘insurance cut’

by FARA AISYAH/ graphic by MZUKRI

MARKET consensus on another Overnight Policy Rate (OPR) cut is growing, following Malaysia’s weak second-quarter (2Q20) economic performance, while the end of the blanket loan moratorium next month is set to further compress cashflows.

RAM Rating Services Bhd economist Woon Khai Jhek expects Bank Negara Malaysia (BNM) to cut the OPR to 1.5% by year-end as Malaysian Government Securities’ (MGS) yields fell to record lows amid abundant liquidity globally.

“In line with robust foreign demand, yields trended down through July. This broad-based decline was also driven by BNM’s fourth rate cut this year, for a total of 125 basis points (bps) year-to-date (YTD),” Woon said in a note on Wednesday.

The benchmark interest rate currently stands at 1.75%, the lowest since the introduction of the policy tool in 2004, after being reduced four times so far this year.

Concurrently, the benchmark 10-year MGS yield fell to a record low 2.62% as at end-July — down by 32.2bps month-on-month (MoM) — while the shorter-term one-year MGS hit a fresh low of 1.78%, 26.9bps lower from a month ago.

United Overseas Bank (M) Bhd (UOB Malaysia) has also pencilled in another 25bps rate cut at the next meeting of BNM’s Monetary Policy Committee (MPC). The MPC is scheduled to meet twice more this year — once in September and again in November.

“Despite a cumulative 125bps cut in the OPR YTD to a new low of 1.75%, another cut in September cannot be ruled out given official remarks regarding the pace of economic recovery, downside risks to growth and concerns over the impact on borrowers when the loan moratorium ends in September,” UOB Malaysia senior economist Julia Goh and economist Loke Siew Ting said in a report on Tuesday.

Malaysia’s economy contracted by 17.1% in the 2Q20, worse than the average -10.9% economists surveyed by Bloomberg had projected.

The negative GDP print — the worst ever for the country and lowest in the region for the quarter — was due to the impact of pandemic-containment measures, which severely curbed private consumption and trade flows.

The central bank revised its 2020 GDP estimate to -3.5% to -5.5% (versus -2% to 0.5% previously) and expects growth of 5.5% to 8% in 2021.

OCBC Bank (M) Bhd economist Wellian Wiranto also said there is a good chance of another 25bps reduction in the OPR next month.

Despite BNM’s optimistic outlook on the second-half of the year (2H20), the sharp magnitude of the 2Q20 GDP hit and the still uncertain global outlook in the 2H20 would warrant another “insurance cut”.

“Moreover, the timing of the cut would be propitious as well, as it comes not long before the expiration of the six-month loan moratorium,” he wrote in a note last week.

“Given that the moratorium has been key in supporting private consumption — which would have slumped even more considerably in 2Q20 without it — the need to ease the sudden transition back towards having to service loans once more has become even more apparent.”