BNM cut OPR by 25bps in January 2020 MPC. While the 25bps OPR cut was in line with our expectation to take place within 1H 2020, the timing took us by surprise as we anticipated it to happen during May 2020 MPC (after the release of 4Q19 GDP in February). BNM said the adjustment is a pre-emptive measure to secure the improving growth trajectory amid price stability. In line with this, BNM expects growth to gradually improve in 2020. However, while our initial forecast is for a moderation in 4Q19 (3Q19: +4.4% YoY), latest data released showed that momentum has been much weaker than expected following the release of various indicators. Looking ahead, we are maintaining our OPR outlook for 2020 at 2.75% (i.e. no further cuts for the year) unless the global environment and domestic activity weaken further.

DATA HIGHLIGHTS

On the global front, the MPC retained its cautious tone. While the MPC acknowledged that cooling trade tensions and monetary easing have led to improving global trade activity, the MPC remained cautious on the sustainability of growth as downside risks remain. They opined that geopolitical tensions and policy uncertainties could result in a resurgence of financial market volatility and weigh on the global growth outlook.

On the domestic front, the MPC expected moderate growth in 4Q 2019 due to supply disruptions in the commodity-related sectors. Nevertheless, the MPC still expected growth to be within the 4.3-4.8% range in 2019 and gradually improve in 2020. In 2020, growth is expected to be driven by improvement in export performance, continued support from household spending and modest recovery in investment activity. However, the MPC acknowledged that downside risks to growth remain, arising from the external and domestic front. These include uncertainty from trade negotiations, geopolitical risks, increased financial market volatility, as well as prolonged weakness in commodity-related sectors and delays in project implementation.

On inflation, the MPC expected inflation to rise in 2020, albeit at a modest pace. The trajectory of inflation will be dependent on movements in global oil and commodity prices and the timing of the fuel price ceiling removal.

There was no mention of financial market conditions, which suggests that the Committee does not see financial stability as a forefront risk. Nevertheless, financial conditions have continued to ease further. Weighted average lending rate continued to fall in November (-1bps; Oct: -1bps).

HLIB’s VIEW

While the 25bps OPR cut was in line with our expectations to take place within 1H 2020, the timing took us by surprise as we anticipated it to happen during May 2020 MPC (after the release of 4Q19 GDP in February). BNM said the adjustment is a pre emptive measure to secure the improving growth trajectory amid price stability. In line with this, BNM expects growth to gradually improve in 2020. However, while our initial forecast is for a moderation in 4Q19 (3Q19: +4.4% YoY), latest data released showed that momentum has been much weaker than expected on account of renewed deterioration in palm oil production (-17.2% YoY; 3Q19: +9.2% YoY), lack of rebound in mining sector (Oct-Nov 19: -2.7% YoY; 3Q19: -4.6% YoY) and moderation in manufacturing sector (Oct-Nov 19: 2.4% YoY; 3Q19: 3.4% YoY). Looking ahead, we are maintaining our OPR outlook for 2020 at 2.75% (i.e. no further cuts for the year) unless the global and domestic activities weaken further. On this note, the statement also noted that at the current level of OPR, the MPC considers the stance of monetary policy to be appropriate in sustaining economic growth with price stability.

Source: Hong Leong Investment Bank Research - 29 Jan 2020