BNM went ahead of the curve to reduce the OPR by 25bps to 2.75%. With the cut in OPR, it beat the 40% probability placed that BNM will “likely” stay behind the curve in the January policy meeting. We reiterate our view cited in the report dated January 20 where a rate cut is positive as it will help support the economy and capital market as well as help put a lid on the declining business and consumer sentiments.

Moving ahead, room for rate cuts remains if the domestic and/or external environment continues to play up and raise the downside risk on the economy and capital market. Inflation is likely to average around 1.8% to 2.00% from a low base 0.7% for 2019, mostly coming from the cost side and lesser from the demand side.

With limited fiscal flexibility and moderate exports, the bigger role will come from monetary policy. It is to ensure private consumption remains as the growth anchor in 2020. So, another 25bps to 50bps cut from 2.75% is still on our cards and can happen either end 1H2020 or 2H2020, much depends on the potential incoming data. Should there be a 50bps cut, it is unlikely for the economy to experience a “negative real returns”.

• Bank Negara Malaysia (BNM) decided to cut the OPR by 25 basis points to 2.75% after a 25bps cut in May 2019 and a surprise 50bps cut in SRR to 3.00% in November. While the decision to cut OPR may have come as a surprise to the market, it fell into our 60% chance for a cut based on our report on Monday January 20 titled “BNM likely to stay behind the curve” to which the probability of staying behind the curve is 40%.

• Decision to cut the OPR by 25bps to 2.75% is seen as a move “ahead of the curve” and can be viewed positively. A rate cut should provide positive impetus to the economy and the capital market. It should potentially help put a lid on the declining business and consumer sentiments.

• Loans growth has been softening, with NPLs ticking up gradually. Manufacturing is in recession and yet to bottom out. Labour market is getting tougher. Living cost is on the rise. There is growing downside risk on the services sector. If this trend continues, private consumption which is the growth anchor for 2020 may not be able to yield fruitful results. Drag will eat into the overall business activities.

• Furthermore, Ringgit gained by about 0.4% to around 4.05–4.06 against the USD opened the door for a rate cut. Current global uncertainties have softened slightly, but not out of the woods. Adding on, with limited fiscal flexibility, monetary policy will play a crucial role.

• Moving ahead, room for rate cuts remains if the domestic and/or external environment continues to play up and raise the downside risk on the economy and capital market. Inflation is likely to average around 1.8% to 2.0% from a low base 0.7% for 2019, mostly coming from the cost side and lesser from the demand side.

• With limited fiscal flexibility and moderate exports, the bigger role will come from monetary policy. It is to ensure private consumption remains as the growth anchor in 2020. So, another 25bps to 50bps cut from 2.75% is still on our cards and can happen either end 1H2020 or 2H2020, much depends on the potential incoming data. Should there be a 50bps cut, it is unlikely for the economy to experience a “negative real returns”.

Source: AmInvest Research - 23 Jan 2020