• BNM cut OPR to 3.00%

• BNM kept its neutral tone

• BNM expects inflation to remain low

• OPR cut likely to be a one-off

Bank Negara Malaysia (BNM) cut the Overnight Policy Rate (OPR) for the first time since July 2016 and the first adjustment since January 2018. BNM reduced the OPR by 25bps to 3.00% amid weak economic outlook. Subdued inflation, high real interest rates and intensifying downside growth risks are some of the factors supporting the rate cut.

OPR cut likely to be a one-off

High-frequency data for global and domestic conditions suggests a moderate pace of expansion ahead and this resulted in BNM delivering a rate cut in May’s MPC meeting as the central bank saw growing risks in growth and inflation that could undermine consumer and business sentiments. A rate cut could be a tactical and pre-emptive move to counter rising downside risks to the economy and benign inflationary outlook. Thus, being ahead of the curve should allow sufficient time for the impact of monetary easing to trickle down to the real economy, thus preparing the economy to ride the slowdown trend. A small step in interest rate cut helps to boost consumer and investor sentiment as it provides some relief on debt servicing and lowers lending cost for both consumers and businesses.

On the other hand, there is possible negative impact of such a move, including the heavy pressure on the ringgit against the greenback. Fears over the possible exclusion of Malaysian debt from the FTSE World Government Bond Index (WGBI) has already weakened the ringgit and the decision to cut the OPR could weaken the ringgit further. The USD/MYR was little changed for the day at 4.1488 and was at 4.1475 before the rate decision. The ringgit weakened 1.5% against the USD in the past month. For now, USD/MYR may test 4.20 until there is clarity on FTSE Russell’s review on Malaysian bonds as well as BNM’s longer-term plans to develop FX market. We expect USD/MYR to drop to 4.00 – 4.05 by end of the year. There could be a drop in consumer spending over the next few months if prices rise and ringgit weakens further. However, a weakening ringgit is not necessarily a negative on the real economy, given that inflation is subdued and that its effect on exports may be at least neutral.

BNM’s comment in policy statement that the rate reduction is intended “to preserve the degree of monetary accommodativeness” suggests it’s likely to be a one-off calibration and not the start of an aggressive easing cycle, barring a sharp downturn in global growth. Therefore, OPR is expected to stay at 3.00% for the remainder of the year. As long as GDP growth is more than 4% and core CPI still positive, we believe no further change in monetary stance is required at this juncture.

Source: BIMB Securities Research - 8 May 2019