We were anticipating Bank Negara (BNM) to cut rates in September’s MPC meeting but BNM decided to maintain the OPR at 3.00%. In its policy statement, the central bank remained cautious on growth and less dovish, signaling a “wait-and-see” attitude and likely to stay behind the rate cutting curve for some time.

Our decision to keep rates on hold while other central banks are aggressively cutting rates may attract some capital flow. But it is important to note that capital flows are influenced by the external environment. Nevertheless, post-rate cut, the 3-month KLIBOR fell 1bps to 3.39% (down 7bps since May's rate cut). The widening spread between the OPR and KLIBOR indicates that the next direction of OPR is downwards.

• We were anticipating Bank Negara (BNM) to cut rates in September’s MPC meeting but BNM decided to maintain the OPR at 3.00%. Although 2Q2019 GDP grew stronger at 4.9% y/y, underlying sentiments have weakened while poor quality loans have started to pick up slightly and loans growth softened, all pointing to adequate room for a rate cut.

• In its policy statement, BNM remained cautious on growth and less dovish. For a start, there was hardly any comment on “downside risks”. In fact, BNM maintained the tone of “subject to further downside risks” owing to uncertainties from the external and domestic environments, trade tensions and low commodity prices. It seems to indicate that it will adopt the “wait-and-see” attitude and likely to stay behind the rate cutting curve for some time.

• On the MYR outlook against the dollar, we believe that the downside risk on the local currency remains. The movement of the ringgit will somewhat track the yuan trend against the dollar. Should global noises and domestic issues stay fairly settled with a fairly stable yuan fixing, we foresee the ringgit trading around the 4.15–4.20 levels, with the near-term downside risk threshold to be around the 4.23 level.

• With no change to the OPR, there will be no impact to earnings in the banking sector. Even if the November rate cut plays out, the impact to FY19 earnings will be minimal owing to the timing i.e. near the end of the year.

• Our decision to keep rates on hold while other economies are aggressively cutting rates may attract some capital flow. However, it is important to note that capital flows are influenced by the external environment, and emerging markets (including Malaysia) tend to get hit with rising uncertainties. With external noises still remaining loud, capital markets remain volatile.

• Nevertheless, post-rate cut, the 3-month KLIBOR fell 1bps to 3.39% (down 7bps since May's rate cut). The widening spread between OPR and KLIBOR indicates the next direction of the OPR is downwards.

Source: AmInvest Research - 13 Sept 2019