As anticipated, BNM cut OPR by 25bps in March 2020 MPC meeting amid worsening global economic conditions due to the Covid-19 outbreak. Domestically, while the Committee expects growth to gradually improve in the second half of the year, they emphasised on key downside risks due to global and domestic factors. Looking ahead, we expect another 25bps OPR cut, as early as the upcoming 5th May 2020 MPC meeting as i) Covid-19 infections continue to spread to other major economies and ii) continued domestic policy uncertainty pervades the economy.

DATA HIGHLIGHTS

On the global front, the MPC noted that global economic conditions have weakened amid the ongoing Covid-19 outbreak, with disruptions to production and travel activity, especially within the region. This has led to greater downside risks to the global growth outlook, particularly in the near term. On the financial market, the outbreak has also resulted in tighter financial conditions and increased financial market volatility. As some countries have implemented policy responses with an expectation of more to come, BNM expects these policy measures to mitigate the economic impact of Covid- 19.

On the domestic front, the MPC expects growth to be affected by the Covid-19 outbreak, particularly in 1Q20. On the supply side, sectors that are expected to be negatively affected are the tourism and manufacturing-related sectors. In addition to Covid-19 impact on growth, weakness in the agriculture sector is also expected to be prolonged. On the demand side, MPC said private and public sector activities are expected to support 2020 GDP. While household spending is expected to soften amid moderate employment and income growth, investment activity is expected to stage a modest recovery. On 27th January 2020, MOF announced a RM20bn economic stimulus package and downgraded the 2020 GDP projection to 3.2-4.2% YoY from original estimate of 4.8% YoY. While MPC opined that the fiscal package will provide some support to economic activity, the Committee emphasised on key downside risks to growth emanating from global and domestic factors.

On inflation, the MPC expects 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. As we now expect the removal of fuel price ceiling to be delayed until the 2H2020, we lower our 2020 inflation forecast to +1.7% YoY (previous: 2.0%).

MPC statement made no mention of financial market conditions. Nevertheless, weighted average lending rate continued to ease in January (-14bps; Dec: -1bps), pointing to sustained easy monetary conditions.

HLIB’s VIEW

The 25bps cut was within our expectation, as stated in our previous economics report due to widening spread of Covid-2019 and domestic policy uncertainty. We viewed the statement as dovish. Despite BNM expecting growth to improve in the second half of the year, the Committee emphasised domestic and external risks which may dampen the recovery. Consequently, we opine that as MPC sees the economy subjected to further downside risks, there is a possibility for the Committee to pencil in another 25bps cut, as early as the upcoming 5th May 2020 MPC meeting and bring the policy rate to 2.25%.

Source: Hong Leong Investment Bank Research - 4 Mar 2020