OVERVIEW

● An expected cut. As predicted, Bank Negara Malaysia (BNM) Monetary Policy Committee (MPC) has decided to reduce the Overnight Policy Rate (OPR) by 25 basis points (bps) to 3.00% yesterday. Though the market seemed to be rather split between a cut and status quo, the majority appear to lean towards a cut. Meanwhile, the ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25% and 2.75% respectively. The next MPC meeting will take place on 8 and 9 of July.

● Taking the lead. BNM is the first central bank in ASEAN to start loosening its monetary policy. Central banks in Thailand, Indonesia, the Philippines, and even Singapore have expressed similar concern on the economic outlook and seemed to lean towards easing. In the Asia Pacific region, India took the lead when Reserve Bank of India decided to cut its repo rate by 25 bps to 6.00% in April. The last time the MPC decided to cut the OPR was in July 2016. It then raised the OPR by 25 bps in January 2018.

● Timely and complementary move. We view the MPC decision as a pre-emptive and a timely move given the current global economic uncertainty, ranging from the US-China trade tension to the slowdown in global trade due to tech cycle trough and a weak economy in China as well as Europe. In a statement, the MPC stated that the OPR cut is “intended to preserve the degree of monetary accommodativeness,” adding that “it is consistent with the monetary policy stance of supporting a steady growth path amid price stability.” While we concur with its rationale, we believe the move is also timely and would complement the Government’s effort to boost the economy mainly by reviving most of the mega infrastructure projects that were suspended after the 14th General Election last year.

● BNM maintain its downside risk concern. True to the signal it gave in the last meeting, its choice of words this round repeated its concerns on the “downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors.” Meanwhile, barring a major external shock, we expect the OPR to remain at 3.00% this year. This is premised on the expectation that the underlying inflation is expected to remain stable, supported by the continued expansion in economic activity in the 2H19. On this prospect, we are maintaining our USDMYR forecast of 4.10 this year though in the short term it will remain volatile and may test the 4.20 level.

Source: Kenanga Research - 8 May 2019