StanChart: Room for Bank Negara to stay put on OPR next week

PETALING JAYA: Standard Chartered Global Research (StanChart) sees room for Bank Negara Malaysia (BNM) to cut rates only in late first quarter 2017, versus its previous expectation of a 25bps cut at the cental bank’s Monetary Policy Committee’s meeting next week.
“The Malaysian economy remains soft; however, we see room for BNM to keep the Overnight Policy Rate unchanged at 3% on Nov 23,” it said in a report yesterday.
It explained that recent data showed signs of stabilisation, albeit at weak levels. Third quarter 2016 gross domestic product (GDP) surprised to the upside, at 4.3% year-on-year, bringing the nine months of 2016 GDP growth to 4.15% year-on-year.
This is within the government’s growth forecast of 4.0%-4.5% for 2016, whereas the first half of 2016 growth of 4.05% was just above the low end of the range.
“We believe BNM continues to regard market communication as important, and it appears to be conveying a neutral monetary policy stance,” said StanChart.
It said the risks to the Malaysian economy remain to the downside. Private consumption may have been boosted while one-off payouts to civil servants may have helped bolster spending. However, labour metrics continue to soften.
“Although BNM recognises the challenging global economic conditions, we believe that further deterioration will require a monetary policy adjustment. Potential trade protectionist policies from the US and a hard impact on euro-area growth from Brexit are key risks that need monitoring. China remains the elephant in the room, but growth risks in the country appear stable for now,” said StanChart.
It added that the US presidential election outcome adds a layer of complexity to its view on monetary policy, and it would closely watch the impact of related uncertainty on Asian financial markets.
StanChart shifted its duration outlook on Malaysia Government Securities (MGS) to neutral from positive, saying that extreme foreign exchange volatility is likely to cause foreign sentiment towards MGS to deteriorate in the near term.
“We believe positioning has been the key driver of the sell-off in the bond and swap markets. Our recent client conversations suggest that fast-money accounts had heavy receive positions in front-end ringgit interest rate swap, given that offshore investors largely expected BNM to shift to a more dovish policy stance.”
Its discussions also suggest that real-money investors have extended duration in MGS on the back of curve-flattening expectations.
“Q3 GDP growth beat market consensus, at 4.3%; this may have a bearing on BNM’s policy stance, raising the likelihood that it will keep rates unchanged rather than cut.”
Its neutral outlook is based on high cash holdings by onshore longer-term investors.
“In the near term, we expect foreign investors – especially emerging market local currency bond funds – to reduce their allocations to Malaysia. Their underweight against the benchmark index is likely to rise to 2%-3% from 1% as of end-October.”
In addition, StanChart said, foreign outflows from short-end MGS will be vulnerable to foreign exchange weakness.