KUALA LUMPUR (Aug 5): Even if the United States (US) Federal Reserve cuts its interest rates as anticipated, Bank Negara Malaysia (BNM) is expected to hold the Overnight Policy Rate (OPR) at 3% by the end of 2025, amid a strengthening ringgit.

Maybank Investment Bank Bhd (Maybank IB) said with easing inflation and rising unemployment, expectations are that the US Fed may start to cut the interest rates as early as September 2024, and its economics team expects a 50 basis points (bps) cut to the Fed Fund Rate (FFR) in 2024 and 100 bps cuts in 2025. 

“With the prevailing large 250 bps gap between the (current) OPR of 3% and the FFR of 5.25%-5.50%, the team expects no cut to domestic rates, with the OPR to stay pat at 3% in 2024 and 2025, particularly since the risk to domestic inflation remains to the upside," it said in a note on Monday.

Maybank IB said the anticipations of interest rates in Malaysia to hold steady bodes well for banks’ margins and non-interest income.

“In the absence of rate cuts that could further exacerbate net interest margin (NIM) compression, we expect average NIMs to stabilise with potential upside bias into 2025.

“What has been encouraging as well is that industry current account or savings account (Casa) balances have resumed growth, and this will help ease margin pressure,” it said.

The investment bank unveiled that Maybank’s fixed income research team has been, and continues to be mildly bullish on Malaysian Government Securities (MGS), forecasting the 10-year MGS yield of 3.60% by year-end, from around 3.70% currently, amid a strengthening ringgit, which was traded at 4.493 against the greenback on Monday.

“What this implies is that banks could potentially continue to realise marked-to-market gains on their investment portfolios, which would serve to uphold non-interest income,” it said, adding that the volatility of the currency would serve to ensure that forex income remains buoyant.

With improved prospects for the economy and the banking sector, coupled with a strengthening ringgit, decent valuations and attractive yields, Maybank IB believes the current environment is conducive for further foreign inflows back into the banking sector.

“We expect this overall stance to be positive for Malaysian banks, both from a direct and indirect basis,” it said.

https://www.theedgemarkets.com/node/721659