Possibility for Another 25bps OPR Cut in May MPC Meeting

Bank Negara Malaysia (BNM) lowered its Statutory Reserve Requirement (SRR) ratio by 100bps from 3.00% to 2.00% effective 20 March 2020. BNM also guided that each Principal Dealer is able to recognise MGS and MGII of up to RM1bn, as part of the SRR compliance until 31 March 2021. As a result of these measures, BNM expects approximately RM30bn worth of liquidity will be injected into the banking system. Previously, in November 2019, BNM lowered the SRR by 50bps from 3.5% to 3%, which was its first cut since February 2016. With the 100bps cut, the SRR will be at its lowest rate since April 2011.

During the Global Financial Crisis (GFC) in 2008/09, the SRR was lowered by 50bps to 3.5% in December 2008 (after being maintained at 4% from September 1998 to November 2008) but was later cut aggressively to only 1.0% in March 2009. In view of the recent negative impact from Covid-19 outbreak on the domestic economy, we believe BNM may lower its SRR further from the current 2%, to inject more liquidity into the banking system. Together, with recent moves by BNM to cut its overnight policy rates (OPR), we sense the urgency on BNM’s part to respond quickly in easing monetary policy aggressively, by cutting SRR is to improve loanable funds for banks from reserves to create credit. This will also encourage banks to provide financing for businesses (especially SMEs), as well as to support the domestic economy from falling into possible sharp economic downturn this year. We believe the potential negative impacts of the Covid-19 outbreak and the low global oil prices on the domestic economy may likely to continue into 2Q20.

While M3 supply growth was steady at 3.9% yoy in January from 3.5% in December, we believe that M3 growth may have slowed significantly in February and March, in line with the recent outflow in the domestic equity market amid Covid-19 outbreak concerns as well as low global oil prices. The outbreak will have negative spillover effects on the domestic economy, especially as the entire country is already on a movement control order (MCO) which started from March 18 to 31 to deal with the rise in Covid-19 cases. We believe the cut in SRR was also in a bid to support and increase lending to both households and businesses. Going forward, in terms of monetary policy, we continue to believe that BNM may lower its Overnight Policy Rate (OPR) by another 25bps to 2.25%, possibly in the next Monetary Policy Committee meeting on 5th May 2020. BNM has already cut the OPR by a total of 50bps in its first two meetings of the year in January and March.

Apart from monetary policy measures, we believe there is also an urgent need for further government action on providing further fiscal stimulus measures to support the domestic economy from Covid-19 outbreak as well as possible global supply chain disruption on the country’s exports and manufacturing production. Government acknowledged the need to provide assistance to SMEs, where various financial facilities, loan facilities, restructuring and rescheduling facilities and a six (6) month moratorium on business, SMEs and individuals have been provided. However, we believe additional measures are needed to the existing Economic Stimulus Package (PRE2020) as well as providing additional allocation for development expenditure spending. Government noted that with the postponement of Visit Malaysia Year (VMY) 2020, the Funds allocated for VMY earlier will be channeled to support towards high impact projects and economic growth.

Source: Affin Hwang Research - 20 Mar 2020