OPR may remain at 3% for rest of the year

PETALING JAYA: The strong domestic demand in the second quarter (Q2) could see Bank Negara Malaysia (BNM) maintaining the Overnight Policy Rate (OPR) for the rest of the year.
Economists earlier opined that another cut in interest rates following a 25-basis-point cut last month was plausible due to the lacklustre economic outlook.
Hong Leong Investment Bank (HLIB) Research economist Sia Ket Ee said he is now expecting the central bank to maintain the OPR at 3% for a longer period given the surprise strength of domestic demand in Q2 and expectations of a gradual recovery in H2.
Nevertheless, Standard Chartered Research opined that BNM will cut OPR in November, with growth falling below 4%.
“Although we still see impetus for more monetary easing, we believe the central bank will wait for more data before it sanctions another cut in November,” it said.
The next Monetary Policy Committee meetings are scheduled in September and November.
Sia noted that the only risk that can derail the overall gross domestic product (GDP) growth and prompt BNM to ease monetary policy is a sharper-than-expected deterioration in the external sector, whereby the downside risks remain high and uncertain.
Nevertheless, he foresees a gradual recovery in H2 supported by strength in domestic demand, particularly consumption and infrastructure projects. His full-year GDP growth for 2016 is maintained at 4.2%.
Malaysia’s GDP expanded by only 4% in Q2, due to the decline in exports and drawdown in stocks. First-half GDP was 4.1%.
Sia said factors that will lead to continued recovery in domestic demand for H2 are continued recovery in private consumption boosted by a series of measures to boost household disposable income (EPF contribution, civil servant pay rise, minimum wage hike & OPR rate reduction in July); pick-up in construction activity following the larger-than-expected value of contracts awarded; gradual improvement in agriculture output as the effect from El Nino weather tapers off, leading to smaller decline in production on an annual basis.
Standard Chartered Research has lowered its full-year growth forecast to 3.8% from 4.0% given the slowdown for a third consecutive quarter. It is maintaining a cautious outlook for H2 despite the pick-up in consumption and investment.
“Downside risks to growth remain, especially if the domestic labour market weakens further,” it said.
Meanwhile, Sia opined that headline inflation will average at 2.2% as the underlying inflation is expected to remain stable and consistent with moderate domestic consumption and commodity prices.