Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on November 6, 2019

KUALA LUMPUR: Bank Negara Malaysia (BNM) decided to keep the overnight policy rate (OPR) unchanged at 3% yesterday, in line with the market consensus. However, given the cloudy global outlook for 2020, economists expect at least one rate cut next year.

MIDF Research said the first cut earlier this year was sufficient to support growth and offset the impact of external headwinds on the Malaysian economy.

However, it expects another rate cut in 2020 amid global trade tensions and political instability in developed markets.

The research house pointed out  most macro indicators are showing moderating signs for the economy, including external trade heading towards a contraction this year.

Imports of intermediate and capital goods also continued to weaken, hinting at a slowdown in the next three to six months.

“Hence, we opine [that there will be] another rate cut in 2020 to stimulate the economy, particularly private consumption and investment,” said MIDF in a research note shortly after BNM’s announcement that there is no OPR revision.

Citing the central bank’s statement on the OPR, OCBC Treasury Research economist Wellian Wiranto said maintaining the rate is primarily driven by BNM’s confidence that domestic growth engines are sufficient to compensate for weakening external conditions.

In the statement, BNM said it expects a moderate expansion of economic activities in the third quarter, with growth anchored by firm private-sector expenditure supported by continued employment and wage growth.

Wiranto pointed out the central bank is not as confident regarding external drivers of growth, given that it noted how the slowdown had become more synchronised across advanced and emerging economies, suggesting BNM is concerned about the ripple effect of slower growth in advanced economies on Malaysia.

“To us, the call on whether BNM will cut [the OPR] any time soon or not, including in its next MPC (Monetary Policy Committee) announcement on Jan 22, 2020, has ultimately become a call on whether there is going to be a ‘phase one’ deal between the US and China in the coming weeks.

“This is especially so given that BNM’s statement suggests that, even as it is still comforted by domestic growth drivers, it remains cautious about how global developments have affected not just exports but also investment activities,” said Wiranto.

OCBC expects a deal between the US and China, and therefore any OPR rate cut may be pushed back to mid-2020.

If the deal falls through and trade disputes re-escalate, Wiranto expects BNM to be among the first central banks in the region to ease its rate.

UOB Malaysia senior economist Julia Goh also expects a rate cut by mid-2020.

“With Malaysian exports worsening at a faster-than-expected pace of late and business confidence remaining weak, we stick to our view of another “pre-emptive” 25-basis point (bps) cut in the OPR to 2.75% by 1H20 (the first half of 2020) to further safeguard growth,” she said.

HSBC economist Joseph Incalcaterra expects BNM to cut the OPR twice next year, with a 25bps cut in the first quarter, followed by another 25bps cut in the third quarter.

“Even though Malaysia’s external sector will continue to outperform the region, thanks to strong FDI (foreign direct investment) inflows, growth will nonetheless slow next year. As a result, there may be scope for BNM’s policy stance to turn more dovish in the short term,” he said.

RHB Research economist Ahmad Nazmi Idrus also expects a rate cut early next year despite BNM expecting the domestic economy to remain resilient going into 2020.

“We still maintain that BNM will cut [its] rate early next year, possibly in the first quarter, given the pass-through effect of weaker global growth on the domestic economy. Our projection of a weaker GDP (gross domestic product) growth next year justifies more monetary stimulus,” said Ahmad Nazmi.

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