● Expectedly unchanged. Bank Negara Malaysia (BNM) Monetary Policy Committee (MPC) members opted to maintain the Overnight Policy Rate (OPR) at 3.00% yesterday. This is the third straight time the MPC left the rate unchanged after a sole rate cut for the year at May’s MPC meeting. It also approved the 2020 MPC meeting schedule with the coming meeting fixed on 21-22 January.

● Quick shift in sentiment. The market seemed to have abruptly switched to a more upbeat sentiment following progress in US-China trade talks, and the global rate cut movement led by the US appear to have shown some positive outcome on the economy and financial markets. This have culminated in the US Fed to signal it would refrain from further reductions unless the economy slowed sharply after it expectedly cut rates, its third since July, at last week’s Federal Open Market Committee meeting. As the Fed’s next move appear to be clearer, signalling no further cuts in the near term, it is likely to prompt a shift towards a less dovish sentiment among other central banks in the region. It has also steered the change of the house view on the OPR from a rate cut to no change.

● Remains cautious on the external front. Meanwhile, BNM is cognizant that the global slowdown is “becoming more synchronised across both the advanced and emerging economies,” and “there is also evidence of the weak global trade affecting domestic demand, particularly investment activity.” Nevertheless, there is little changed in BNM’s forward guidance as it continued to highlight that “geopolitical tensions, policy uncertainty and the unresolved trade disputes could exacerbate financial market volatility and further weigh on the global growth outlook.”

● Becoming less dovish. Taking the cue that the Fed would resume its monetary easing mode if the economy signals a sharp slowdown we reckon there is no rush for BNM to cut rates at this juncture. Furthermore, Malaysia is still in US Treasury’s currency manipulator list which could reduce the likelihood that BNM would cut rates especially if there are signs of improvement in the economy. Nevertheless this seemed to have led to improvement in investor sentiment as the ringgit has strengthened to around 4.1310 yesterday against the US dollar from October’s low of 4.1978 (Oct 9). However, given the prevalent state of uncertainty in both the global and domestic economy, we expect BNM to still lean towards a rate cut to lend support to growth as it clearly stated that “Monetary easing and other policy measures are expected to provide some support to growth.” For the next 6-12 months, we reckon BNM still has room for two more rate cuts or up to 50 basis points till the OPR hits 2.50%. The OPR hits its lowest at 2.00% during the Global Financial Crisis in 2009.

Source: Kenanga Research - 6 Nov 2019