● As expected, the Federal Open Market Committee (FOMC) unanimously left its benchmark interest rate unchanged at a target range of 0-0.25%.

● Committed to use range of tools. In its statement, that it will commit to keep interest rates at near-zero until the policymakers are “confident that the economy has weathered recent events.” It also assures that it will use its full range of tools to support the U.S. economy "in this challenging time." It isn't taking any new actions but will continue to "purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning." The Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations.

● Cautious as growth tumbles. On the economy, the committee remained cautious as it sees the "The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” Earlier, the first estimate of 1Q20 GDP, saw the first contraction in six years at -4.8%, the biggest decline since the last recession.

● Fed Chair Jerome Powell: Lowering interest rates won't reverse the economic downturn caused by the virus, but "preserving flow of credit is essential" to minimize the damage caused from the virus. As in the committee's statement, Powell reinforces that the central bank will use its range of tools to support the economy. "We're doing all we can to help Americans weather this difficult period" and to ensure that when the recovery comes it will be as robust as possible, he said. The 10-year Treasury yield was at 0.61%, little changed from before the announcement.

● BNM has room for further easing. With inflation at -0.2% in March and the deflationary trend to continue well into 2020 as the economy enters into a recession due to the impact of COVID-19 pandemic and oil prices at record low, there is ample room for BNM to cut interest rates. Hence, there is room for BNM to reduce the overnight policy rate (OPR) by another 50-75 basis points (bps) which is currently at 2.50%.

● A possible pause. Though we see ample room for BNM to embark on a rate cut, the possibility of doing so in the short term may have been reduced, given that it has embarked on an aggressive monetary easing since early this year: 50 bps cut of both OPR and statutory reserve requirement, as well as large purchase of monetary instruments. Furthermore, the reason could also be that it may want to observe the impact of large government fiscal stimulus package to support the economy. Perhaps BNM may also want to save some bullets for future needs should the crisis worsen and prolonged.

Source: Kenanga Research - 30 Apr 2020