● Bank Negara Malaysia (BNM) reduced the overnight policy rate (OPR) by 25 basis points (bps) to a record low of 1.75%, within market and house view.

- Likewise, the ceiling and floor rates of the corridor of the OPR are reduced to 2.00% and 1.50%, respectively

- The market (Bloomberg survey) was leaning towards a 25 bps cut (14 respondents), while four predicts a 50 bps cut, and status quo (7).

● MPC statement: Concern of a sustainable recovery ahead.

- The Monetary Policy Committee (MPC) are still concerned on the severity of the impact of COVID-19 on the global economy. It states that “although a trough is expected in the second quarter, broad-based weakness in labour markets and precautionary behaviour by households and businesses could affect the recovery going forward.”

● Growth outlook: To severely impact 2Q20 but recovery depends on downside risks domestically and abroad

- BNM is still unclear on the pace and strength of the recovery but admits that it is “subject to downside risks emanating from both domestic and external factors.” The list of concerns includes “the prospect of further outbreaks of the pandemic leading to re-impositions of containment measures, more persistent weakness in labour market conditions, and a weaker-than-expected recovery in global growth.”

- We estimate that the GDP growth in the 2Q20 would fall by 7.5% (1Q20: +0.7%) and for the whole year at -2.9% while the official GDP forecast remained at -2.0% to +0.5%. The latest cut indicates that BNM could expect a more severe growth trajectory and taking a pre-emptive stance.

● Rate outlook: Still room to cut rates at next meeting

- BNM sees a limited decline in prices “as economic activity resumes and demand conditions improve.” But on average it still sees “headline inflation to be negative this year, primarily reflecting the substantially lower global oil prices.” While the disinflationary factor continues to provide the space for monetary easing, a rate cut also serve as a relief to debtors especially SMEs and poor households once moratorium of debt repayments ends in September.

- More importantly, BNM clearly states its intention that “the reduction in the OPR provides additional policy stimulus to accelerate the pace of economic recovery.” Hence, given the dovish tone derived from its monetary policy statement we expect BNM may embark on another 25 bps cut, bringing the OPR to a fresh record low of 1.50% at the next policy meeting in September

Source: Kenanga Research - 8 Jul 2020