'High possibility’ BNM reduces OPR by 25bps to all-time low of 1.5% — TA Securities

-A +A

KUALA LUMPUR (Sept 9): There is a high possibility Bank Negara Malaysia (BNM) will reduce the Overnight Policy Rate (OPR) by another 25 basis points (bps) in the upcoming monetary policy meeting tomorrow to support the country’s economic growth, according to a research note by TA Securities Holdings Bhd today.

TA Securities analyst Wong Li Hsia wrote in the note that the 25bps cut will reduce the OPR to an all-time low of 1.5%, after which the firm foresees the central bank leaving the OPR unchanged for the rest of the year. 

"Possibility of another 25bps rate cut this week,” Wong said.

"Corresponding to the decline in OPR thus far, the (banking) sector’s average net interest margin (NIM) has also narrowed quite substantially over the past several quarters. Exacerbated by the impact of modification loss in 2QCY20, the average sector’s NIM slipped to 1.92% vs. 2.13% in 1QCY20 and 2.07% a year ago.

"Assuming a 25bps cut, we do not foresee the additional OPR cut to make another huge dent in the sector’s NIM and earnings. As such, we envisage 3QCY20 NIM to be relatively stable, with sequential improvements due to the absence of chunky modification loss from the 2QCY20,” she said.

CY stands for calendar year while modification loss refers to the loss incurred by banks due to changes to the terms of loans extended to borrowers.

Changes to the terms of loan agreements follow the implementation of the loan-repayment moratorium in Malaysia to help borrowers cope with the impact of the Covid-19 pandemic.

BNM in March 2020 announced the six-month loan-repayment moratorium starting April 1, 2020 to help individuals and businesses affected by the Covid-19 pandemic, which led to the Malaysian government implementing the Movement Control Order (MCO) to curb the outbreak.

TA Securities is not the only one anticipating BNM will further reduce the OPR.

On Aug 31, 2020, news reports, quoting DBS Group, said BNM is expected to make one final 25bps cut in the OPR as early as in the central bank’s next Monetary Policy Committee meeting tomorrow in anticipation of an arduous economic recovery path ahead.

It was reported that DBS senior economist Irvin Seah and strategist Duncan Tan wrote in a note that there is room for further monetary easing to support economic growth in the coming months.

"Onshore IRS (interest rate swap) markets are pricing ~70-80% chance for one last BNM rate cut (25bps) of this easing cycle, either to occur at the Sept 10 or Nov 3 meeting. This would mean BNM hitting our estimate of the policy lower bound of 1.5%, by the end of the year.

"Note (that) BNM had cut the OPR by a total of 125bps year-to-date to 1.75% to complement the equally robust fiscal measures aimed at buffering the economy from the impact of the pandemic. But with growth surprising on the downside and an arduous recovery path ahead notwithstanding, there is room for further monetary easing to support growth in the coming months. 

"As such, we now expect one final 25bps cut by BNM as early as in the forthcoming September meeting, to better align the risks in both inflation and growth,” Seah and Tan said.

Chong Jin Hun