BNM’s decision to cut the OPR by 25bps to 3.00% in May is a move to support growth which is expected to be more subdued than expected. With the rate cut, BNM becomes the second central bank to reduce the policy rate after India and we expect some Asean countries and China, which are also bracing for slower growth as exports take a knock from weaker global demand and rising trade tensions, to potentially ease their policy rates.

Added with external headwinds, GDP growth in 1Q2019 is likely to remain weak. Though there is some room for 1Q209 GDP to reach 4.5%, more conservatively, it could be reading around 3.8% to 4.2%. The downside risk to growth is poised to stay in the near term in view of the ongoing external headwinds and domestic challenges. While our base case GDP outlook is at 4.5%, the downside risk shows growth could dip below BNM’s forecast of 4.3%–4.7% and the government’s projection of 4.9% to as low as 4.0%.

Will BNM institute another rate cut? Much will depend on the severity of the downside risks to growth from the heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors. Another consideration will be if there is still evidence of a tightening in financial conditions even after a 25bps rate cut to 3.00% intended to preserve the degree of monetary accommodativeness. Though our base case suggests for only one rate cut by July 2019, we have factored in a 40% chance of a second rate cut later in 2019 or early 2020 should the potential incoming data remains weak.

In the meantime, looking at the SRR which is currently at 3.50%, the last time BNM reduced the SRR was in January 2016 as part of a comprehensive effort to ensure sufficient liquidity in the domestic financial system, and to support the orderly functioning of the domestic financial markets. Should a scenario similar to 2016 emerge, the possibility of an SRR cut could arise. A 50bps cut in the SRR would free up around RM7.0 billion in the system. However, its effectiveness remains a challenge on fear that the additional liquidity may not fully seep into the real economy but find its way into the financial market.

• Bank Negara Malaysia (BNM) cut its benchmark interest rate for the first time since July 2016 with the aim to support growth as global risks mounted, added with domestic challenges. BNM reduced its overnight policy rate by 25bps to 3.00% as predicted by 14 of 23 economists. We looked at a July rate cut right from the beginning of the year with a 60% chance of it happening in May.

• With the rate cut, BNM becomes the second central bank to reduce the policy rate after India. With Asean countries and China bracing for slower growth as exports take a knock from weaker global demand and rising trade tensions, we expect other central banks such as those in the Philippines and Indonesia to potentially ease their policy rates.

• The May rate cut by BNM suggests the domestic economic growth is expected to be subdued. Underpinned by weak exports, eroding business and consumer sentiments, tightening liquidity, rising deposits, slower money supply growth, soft house prices, tame inflation and huge positive real returns are some of the factors that are pointing towards a more subdued growth.

• Added with external headwinds, the GDP growth in 1Q2019 is likely to remain weak. Though there is some room for 1Q209 GDP to reach 4.5%, more conservatively, it could be reading around 3.8% to 4.2%. The downside risk to growth is poised to stay in the near term in view of the ongoing external headwinds and domestic challenges. While our base case GDP outlook is at 4.5%, the downside risk shows growth could dip below BNM’s forecast of 4.3%–4.7% and the government’s projection of 4.9% to as low as 4.0%.

• Will BNM institute another rate cut? Much will depend on the severity of the downside risks to growth from the heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors. Another consideration will be if there is still evidence of tightening in financial conditions even after a 25bps rate cut to 3.00% intended to preserve the degree of monetary accommodativeness. Though our base case suggests for only one rate cut by July 2019, we have factored in a 40% chance of a second rate cut later in 2019 or early 2020 should the potential incoming data remains weak.

• In the meantime, looking at the SRR which is currently at 3.50%, the last time BNM reduced the SRR was in January 2016 as part of a comprehensive effort to ensure sufficient liquidity in the domestic financial system, and to support the orderly functioning of the domestic financial markets. Should a scenario similar to 2016 emerge, the possibility of an SRR cut could arise. A 50bps cut in the SRR would free up around RM7.0 billion in the system. However, its effectiveness remains a challenge on fear that the additional liquidity may not fully seep into the real economy but find its way into the financial market.

Source: AmInvest Research - 8 May 2019