• BNM left OPR at 3.00%

• The central bank continued to emphasize the downside risks to growth

• BNM expects inflation to rise in months ahead

• Expect no further cuts in the OPR

Bank Negara Malaysia (BNM) decided to maintain the Overnight Policy Rate (OPR) at 3%, after trimming it by 25bps in the previous meeting, as global economy continues to expand moderately.

In the Monetary Policy Statement (MPS), the policymakers said that the stance of monetary policy remains accommodative and supportive of economic activity. The Committee added that they will continue to assess the balance of risks to domestic growth and inflation, to ensure that the monetary policy stance remains conducive to sustainable growth amid price stability.

Expect no further cuts in the OPR

As expected, the central bank remained status quo in its policy decision, keeping the OPR unchanged at 3.00%. BNM’s comment in policy statement that it will continue to assess the balance of risks to domestic growth and inflation, to ensure that the monetary policy stance remains conducive to sustainable growth amid price stability. Our base case is still for BNM to hold the benchmark rate for the rest of 2019 but we also do not rule out additional cuts if growth risks worsen.

While the outlook has dulled amid rising global risks, growth prospects remain relatively robust on an absolute level, with the pre-emptive 25bps rate cut in May could likely support the macro conditions into 2H19. So far, the economy is holding up well with growth likely picking up in 2Q19 from 4.5% in 1Q19. Inflation though likely to rise, will continue to remain manageable thus allowing plenty of space for more easing if required. Although there is clearly room for more monetary easing, we are projecting a flat trajectory for the OPR in 2H19.

Meanwhile, downside risk to growth has increased from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodityrelated sectors. The escalation in US-China trade tensions could hurt Malaysia’s growth outlook and present further downside risks for interest rates. Although we expect no further cuts in the OPR for the remainder of 2019, we believe the worsening global trade outlook will weigh on Malaysia’s external trade and could put a dent on economic growth, and hence increasing the downside risks on interest rates.

The possibility of another rate cut could happen but pending outcome of latest trade truce between US and China. Failure to reach an accord will intensify risk of full-blown US-China trade war and adverse impact on external demand that would necessitate policy action by the central bank to support domestic growth. Also, if the global downside risks flare up with increasing monetary easing taking place, it further opens the door to a rate cut to take place to ensure interest rate differentials do not widen too much and put Malaysia in an awkward position.

However, at 3.00% the current OPR is still accommodative, whilst downside risk to growth may see prospects of further easing possibly next year. We opine the direction of monetary policy stance will remain data dependent as focus on growth takes precedence.
 

Source: BIMB Securities Research - 9 Jul 2019