Bank Negara Malaysia (BNM) slashed the overnight policy rate (OPR) by 25 basis points (bps) to 2.50%, in line with house and market expectation

• Monetary Policy Committee (MPC) left the statutory reserve requirement rate at 3.50%.
• Market (Bloomberg survey) was leaning towards a cut (15 respondents) and status quo (9).

MPC statement: balance to downside risk up.

• It is cognisant of the extent of the impact of COVID-19 disrupting production and travel activity, as well as financial market volatility, especially within the region.
• Seeing downside risks to the global growth outlook, BNM expects further anticipated policy measures both monetary and fiscal globally to mitigate the economic impact of COVID-19.

Growth outlook: to severely impact 1Q20 but to gradually improve in 2H20 as stimulus works its way

• BNM sees 1Q20 growth to be hit the hardest “primarily in the tourism-related and manufacturing sectors” along with the agriculture sector. House projection for 1Q20 GDP growth is 3.2% (4Q19: 3.7%) but that has yet to fully take into account the extended impact of COVID-19 which is now increasingly spreading beyond China.
• For 2020, BNM expect domestic demand, both “private and public sector activities will be supportive of growth,” in the 2H20 while “investment activity is projected to record a modest recovery, underpinned by ongoing and new projects.” Along with the economic stimulus package providing support to economic activity, we maintain our 2020 GDP growth forecast of 4.0% for now (official forecast: 3.2%-4.2%).

Rate outlook: still has room to cut but all depends on severity of impact of COVID-19 going forward

• BNM expects “headline inflation to average higher but remain modest for 2020” and the trajectory would be dependent “on global oil and commodity price” and “timing of the lifting of domestic fuel price ceilings.”
• By stating that “the reduction in the OPR is intended to provide a more accommodative monetary environment to support the projected improvement in economic growth amid price stability,” we believe that this could signal that BNM has room to further cut the OPR if needed. How soon and how much BNM is willing to cut depends on whether COVID-19 impact would worsen and becomes a pandemic, triggering an imminent global crisis or recession

Source: Kenanga Research - 4 Mar 2020