Yesterday, Bank Negara Malaysia (BNM) cut its overnight policy rate (OPR) by 0.5% to 2.0%, the lowest in 10 years since the 2008-2009 global financial crisis. While this is in-line with Macquarie Equities Research’s (MQ Research) earlier forecast, MQ Research anticipates a further 0.5% cut in 2H20, bringing the OPR to 1.5%. What are the implications if another rate cut were to happen?

Event

• Malaysia’s central bank, BNM, reduced the benchmark OPR by -50bps to 2.00% at the Monetary Policy Committee meeting yesterday. This is the third consecutive cut (two cuts of 25bps since January) in 2020, bringing OPR down to global financial crisis lows.

• Macquarie’s desk strategy team anticipates another 50bps cut is likely in 2020, bringing the OPR to 1.5%.

Impact

• The 50bps cut is in-line with MQ Research’s expectations, as articulated in MQ Research’s earnings downgrade note (Read here). However, MQ Research flags downside risk if interest rates are cut further. Considering the estimated (by BNM) RM63bn hit to gross domestic product (GDP) during the Movement Control Order (COVID-19 lockdown), roughly 4.2% pf GDP, MQ Research sees downside risk to BNM’s -2.5% to +0.5% y/y GDP projections in 2020 driving the OPR cut. The disinflationary pressure from weak domestic demand and falling energy prices should provide ample headroom for a cut. Public’s net profit would be most sensitive.

Outlook

• While a further -50bps cut would hurt margins, MQ Research takes a constructive view on monetary easing. It will provide further stimulus to the economy by easing credit costs, which should also temper asset quality risks. Nonetheless, MQ Research would like to see direct liquidity measures expanded, e.g. the Special Relief Fund loans. Note, March bank stats will be published around noon today (6 May).

• MQ Research maintains CIMB as its top pick, with RHB a close second. Public Bank is MQ Research’s preferred defensive pick, while MQ Research has a negative short-term bias on Maybank and AmBank.

Source: Macquarie Research - 6 May 2020