After a 25bps OPR rate cut in May 2019 to 3.00%, the central bank held rates steady in the subsequent two meetings in 2019 i.e. September and November. With 2020 unfolding, the first MPC meeting will be on 21—22 January. Will there be a rate cut during the BNM’s January MPC meeting?

Manufacturers’ optimism is likely to continue experiencing a noteworthy setback in 2020. There remains considerable uncertainly for businesses. Higher business costs remain. The risk of slower manufacturing and trade cannot be ruled out. Although the first phase of the China and US trade deal has been concluded, tariffs remain. It is still unclear if they will be rolled back imminently. Businesses may not use China as a platform for products destined for the US market. With uncertainties to continue into 2020, and manufacturers’ optimism likely to continue experiencing a noteworthy setback, the worry of “manufacturing recession” by many companies is still on the table.

At the same time, consumer sentiment remains challenging. The labour market is likely to be tough, especially with employment expectations for 2020 from both manufacturing and services being soft. With less favourable finances, weak job outlook, pressure on income expectations while low-income households, rural areas and the eastern region are most anxious about rising prices, and high household debt, sentiments will continue to be dented. These will reduce their spending on big-ticket items like motor vehicles, patronize less in restaurants and hotels, and cut back their purchases of recreational goods as well as transport and communication services.

With the overall business and consumer sentiments declining and at a time where the ringgit rose by about 0.4% to around 4.06 levels against the USD, it provides ample room for a rate cut. Besides, current global uncertainties are on a softer tone. A rate cut can be viewed positively as it should provide positive impetus to private consumption which is the anchor for growth and investment with exports complementing in 2020.

However, during the November’s MPC meeting, Bank Negara left the policy rate unchanged and was less dovish with a positive growth outlook. Furthermore, major central banks like the US Fed, ECB, BoE and BoJ are expected to maintain their current accommodative monetary policy during the January policy meetings. Likewise, Bank Indonesia is also not expected to cut rates during its January policy meeting. On that note, Bank Negara is more likely to stay behind the curve and maintain the OPR at 3.00%.

Source: AmInvest Research - 20 Jan 2020