● A not so surprised cut. Bank Negara Malaysia (BNM) Monetary Policy Committee (MPC) members decided to cut the Overnight Policy Rate (OPR) by 25 basis points (bps) to 2.75% yesterday. Following the rate cut, the ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 3.00% and 2.50%, respectively. While the market was not expecting a rate cut this round (Bloomberg survey: two correctly expected the decision, 19 expected a pause), the house view has been that BNM would likely reduce the OPR in the 1Q20, with a fair level of probability that it might do so yesterday.

● Breaking the long pause in an easing cycle. This is the second rate cut since BNM started the easing cycle in May last year when it made a similar 25bps cut. While it paused in cutting the OPR in the last three MPC meetings, BNM decided to cut the statutory reserve requirement by 50 bps to 3.00% on November 8th or just a few days after the last MPC meeting for the year.

● A pre-emptive measure on growth concern. In a statement, the committee said that “the adjustment to the OPR is a pre-emptive measure to secure the improving growth trajectory amid price stability.” This reaffirms our believe that despite the de-escalation of the trade war, signs of green shoots and strong US economic data, BNM is fully aware that the domestic economy remains weak and want to make sure that it would not slow further this year. Furthermore, the decision is backed by its measured conviction that “for 2020, growth is expected to gradually improve, with continued support from household spending and better export performance.” Nonetheless, we expect GDP growth would slow to an estimated 4.0% (3Q19: 4.4%) which would bring about full year growth of 4.5%, short of the official target of 4.7%. Given the abating growth momentum, we forecast GDP growth to slow further in the 1Q20 (3.8%), which may partly explain why BNM decided to cut.

● Unspoken concern. It mentioned “geopolitical tensions and policy uncertainties” and further listed “uncertainty from various trade negotiations, geopolitical risks, weaker-than-expected growth of major trade partners, heightened volatility in financial markets, and domestic factors that include weakness in commodity-related sectors and delays in the implementation of projects” as lingering downside risks to growth. However, we suspect the growing concern of the spread of Coronavirus might have partly influenced and hasten BNM’s decision to cut this round. This reminisced the SARS outbreak in 2003, whereby BNM had decided to cut the intervention rate by as much as 50 bps to support the economy and the government pumped in RM7.3b to support the tourism, retail and transport services sector.

● Would there be a further cut? Perhaps. But for the time being BNM has signalled a pause, stating that “at this current level of the OPR, the MPC considers the stance of monetary policy to be appropriate in sustaining economic growth with price stability.” However, given the prevalent state of uncertainty in both the global and domestic economy, we expect BNM to still lean towards another rate cut this year.

Source: Kenanga Research - 23 Jan 2020