OVERVIEW

Bank Negara Malaysia (BNM) held its Overnight Policy Rate (OPR) at 3.00% at the latest Monetary Policy Committee (MPC) meeting ended September 7. The decision followed an unexpected 25-basis point cut at the July meeting, which was the first change to the OPR in two years. The Statutory Reserve Requirement (SRR) was also left unchanged at 3.50% for the fourth straight meeting after a 50-basis point cut in January. Since the last MPC meeting, the Reserve Bank of Australia was alone among major central banks in the region to further cut its policy rate to a record low of 1.50%. In its monetary policy statement, BNM said the degree of monetary accommodativeness is consistent with the policy stance to ensure steady growth for the domestic economy amid stable inflation. Although BNM has not provided guidance on future changes to the OPR, we view that there is still room for another rate cut if the macro environment worsens. However, in light of the weak banking sector and the strong possibility of the US Federal Reserve to resume its rate tightening mode soon, BNM may opt to cut the Statutory Reserve Requirement (SRR) instead. This is also assuming that domestic demand is still holding up and supportive of economic growth

BNM’s Monetary Policy Committee (MPC) made an announcement on September 7 to maintain its Overnight Policy Rate (OPR) at 3.00%. This was the first MPC meeting to take place after BNM cut its OPR by 25 basis points in July, which was the first change to the OPR in two years and the first time the central bank eased monetary policy since February 2009. The Statutory Reserve Requirement (SRR) was left unchanged at 3.50% for the fourth straight meeting after a 50 basis point cut in the January meeting.

The BNM decision was broadly in line with market expectations (14 out of 17 economists polled predicted no change to the OPR).

In its MPC statement, BNM noted the global economy continues to expand at a modest pace. In Asia, it noted growth has become more dependent on domestic demand due to weak export growth. The central bank views international financial markets as being vulnerable to setbacks and changes in sentiments although volatility has recently subsided.

BNM was upbeat on the prospects for the Malaysian economy despite slower GDP growth in the 2Q16 quarter. It noted that private consumption has been growing at a faster pace and will continue to be supported by gradual wage and employment growth as well as recent government measures to increase disposable income. GDP growth is expected to come in within expectations.

On inflation, BNM said it expected inflation to average at the lower end of their 2.0% to 3.0% range for 2016 and remain relatively stable in 2017.

BNM views the degree of monetary accommodativeness as consistent with the policy stance to ensure steady growth for the domestic economy amid stable inflation. There was no indication of the timing of the next change to the OPR in the MPC statement.

Federal Open Market Committee (FOMC) officials of the U.S. Federal Reserve are nearing a decision to raise interest rates for only the second time since the end of ZIRP in December 2015. Of the three remaining meetings to take place this year in September, November and December, the likeliest outcome is a December rate hike of 25 basis points, based on federal funds futures trading.

OUTLOOK

Although BNM has not provided guidance on future changes to the OPR, we see there is room for BNM to cut interest rates if the macro environment takes a turn for the worst. However, there is a higher possibility that BNM would prefer to cut the SRR given the current weakness in the financial sector as well as the likelihood that the US Fed would resume its rate tigthening mode. This is also assuming that domestic demand is still holding up and mitigating the weakness in external demand.

Meanwhile, a comparison of regional central bank policy rates shows that a wide interest rate differential has been building up between Malaysia and regional trading partners, suggesting that a loosening of monetary policy would not be a large disruption. Furthermore the risk of widening the interest rate differential with the US Federal fund rates has largely been diffused by the Fed further pushing back the next interest rate hike adjustment toward the tail end of the year.

BNM repeated its concluding remarks of: “the MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation” for the second consecutive meeting which we understand to mean that the possibility of a OPR cut in the next meeting should not be ruled out. The remarks are a departure from the last eight decisions, when BNM consistently stated that the policy stance was “accommodative and supportive of economic activity.”

Source: Kenanga Research - 8 Sep 2016