The dovish tone by BNM is not surprising given the challenging external and domestic environment. And so the decision to cut the OPR by 25bps to now 2.50% fell in line with our view. With the OPR cut complementing the RM20 billion stimulus package, it should help address the downside risk on the economy from the coronavirus impact more than trade issues.

The drag on the economy could continue into 2Q2020. Much depends on the severity of the coronavirus impact that is already disrupting global supply chains and shipping. Thus, another 25bps rate cut is still on the table should there be a need to support private expenditure and help ease upwards pressure on non-performing loans. Room for lowering the SRR by 50bps remains.

• The decision to cut the OPR by 25bps to now 2.50% fell in line with our view although market expectations were mixed. With the OPR cut complementing the RM20 billion stimulus package, it should help address the downside risk on the economy from the coronavirus impact more than trade issues. Added with domestic challenges, the economic performance in 1Q2020 is likely to stay below the 3.6% GDP growth reported in 4Q2019.

• The drag on the economy could continue into 2Q2020. Much depends on the severity of the coronavirus impact that is already disrupting global supply chains and shipping. It is impacting exports and imports, thus already hurting manufacturing production and affecting services. In containing the downside risk of the economy, much depends on how fast the government will be able to roll out the stimulus measures and Budget 2020 initiatives.

• Besides, another 25bps rate cut is still on the table should there be a need to support private expenditure and help ease upwards pressure on non-performing loans. Room for lowering the SRR by 50bps remains. By freeing up 50bps, it would inject around RM8–9 billion which could be injected into the Special Investment Fund to aid SME businesses.

• With the OPR cut, it may provide some short-term positive impetus for the ringgit, more likely to appreciate against the USD around 0.1%–0.2%. However, any movement in the ringgit will be influenced by ongoing external and domestic challenges. The rate cut should see bond yields in the near term probably falling around 1.5%–2.0%.

• Meanwhile, we see only minimal impact to bank’s earnings with respect to March’s rate cut. Based on our estimates, for every 25bps rate cut in the OPR, the banks’ earnings will be impacted by 1 to 3% while the NIMs will be impacted by 2– 4bps. The impact of any OPR change will be short term (estimated 1 to 2 quarters) as repricing of deposits will eventually catch up with the change in lending rates.

Source: AmInvest Research - 4 Mar 2020