This article first appeared in The Edge Financial Daily on September 13, 2019

KUALA LUMPUR: Bank Negara Malaysia (BNM) decided to keep the overnight policy (OPR) rate at 3%. The central bank believes the stance of Malaysia’s monetary policy, at the current level of OPR, remains accommodative and supportive of the country’s economic activities.

Economists, however, are divided whether BNM will have another another rate cut before the year ends.

OCBC Bank pointed out that BNM’s monetary policy statement released yesterday had retained a disclaimer clause of how “uncertainty from the prolonged trade disputes and geopolitical developments could lead to excessive financial market stability”, which points to a continued dovish bias by the central bank.

“That supports our view that it will likely trim the OPR further, with a 25 basis points (bps) cut coming as soon as the next meeting on Nov 5. By then, they and the market would have a better sense of how much support is to be expected from the fiscal engine, with the tabling of Budget 2020 on October 11.

“While Finance Minister Lim Guan Eng has hinted the government will no longer aim for a deficit target of 3% of gross domestic product (GDP) — which would represent a sizeable fiscal tightening from this year’s expected 3.4% deficit – it is hard to imagine any significant largesse from the upcoming budget.

“Absent any freewheeling fiscal support, monetary policy would have to be the game in town,” OCBC added.

On the other hand, UOB Malaysia said BNM had kept a neutral tone suggesting no further rate cuts for now.

It maintained its year-end OPR target at 3%, premised on a stable growth trajectory in the second half of the year and assuming a protracted negotiation between the US and China will produce some resolution although existing tariffs may not be removed.

“Although the US Federal Reserve is expected to embark on further rate cuts, we think BNM is likely to be more cautious and gradual in their monetary approach to avoid setting rates ‘too low and too fast’.

“This will be accompanied by necessary fiscal support as the government is expected to step up spending, and adopt a more pragmatic and expansionary approach in the upcoming budget to support the economy... We project OPR to stay at 3% for the rest of the year, followed by a potential 25bps cut to 2.75% in the first quarter of 2020 (1Q20),” said UOB.

MIDF Research concurred saying that OPR should stay at 3% for the remainder of the year, as the research house views the 25bps cut in May as sufficient to boost economic growth, particularly domestic demand.

“As long as major macroeconomic indicators especially GDP growth remains stable and above 4% besides gradual increase in core inflation, we opine no further change in monetary stance is required at this juncture.

“Besides that, the US Federal Reserve has only reduced its key policy rate by 25bps so far. Since there will be less pressure from both domestic and external fronts, we anticipate that Bank Negara will maintain the OPR at 3% rest of 2019,” said MIDF.

BNM said in yesterday’s statement that domestic drivers of growth, alongside stable labour market and wage growth, are expected to remain supportive of economic activity going forward; while on the external front, Malaysia’s diversified exports will partly mitigate the impact of softening global demand.

The central bank has kept its overall baseline growth projection for 2019 within the range of 4.3% and 4.8%.