Bank Negara keeps key interest rate at 3%, warns of downside risks from trade spat

PETALING JAYA: Bank Negara Malaysia (BNM) maintained the Overnight Policy Rate (OPR) at 3% at its Monetary Policy Committee (MPC) meeting today, in line with market expectations.

“It’s relatively viable for BNM to maintain the OPR. There’s always ample room for them to cut rate the next time because inflation is trending low,” Kenanga Investment Bank economist Atiqa Noor Azlan told SunBiz.

She pointed out that the central bank is more pessimistic on the global growth outlook this time, judging from the words used, such as “expanding at a more modest pace” versus “expanding moderately” in its previous statement.

For the rest of the year, Atiqa said, BNM may embark on a rate cut, possibly in November, hinging on developments in the US-China trade war. It forecast the ringgit to trade at RM4.20 against the US dollar and moving on a weaker trend, mostly influenced by the trade war.

MIDF Research said the 25bps cut by BNM in May 2019 is 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 Fed 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 BNM will maintain the OPR at 3.00% for the rest of 2019,” said MIDF Research.

On the external front, it said that Malaysia’s external trade performance is gradually recovering as export growth returned to positive territory but imports remained negative, thus widening the trade surplus. Concerns over the US-China trade crusade remain but are comforted temporarily as the duo delayed their latest round of tariff increases. Domestically, distributive sales continued to expand but at a slightly moderating pace.

“We anticipate inflationary pressure mainly from fuel-related items to remain weak in line with our expectation of Brent crude oil price at US$63 per barrel for 2019, compared with US$71.6 per barrel in 2018.”

BNM said the MPC will continue to assess the balance of risks to domestic growth and inflation, to ensure that the monetary policy stance remains conducive to sustainable growth amid price stability.

“At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity.”

While the 2019 growth forecast of 4.3% to 4.8% for the Malaysian economy remains unchanged, BNM said it is subject to further downside risks from worsening trade tensions, uncertainties in the global and domestic environment, and extended weakness in commodity-related sectors.

However, it noted that Malaysia’s diversified exports will partly mitigate the impact of softening global demand.

BNM cautioned that the recent escalation of trade tensions points to weaker global trade going forward, with increasing signs of spillovers to domestic economic activity in a number of countries.

“Monetary policy easing in several major economies has eased global financial conditions, but uncertainty from the prolonged trade disputes and geopolitical developments could lead to excessive financial market volatility.”

Meanwhile, the central bank said the trajectory of headline inflation will be dependent on global oil and commodity price developments. “Underlying inflation is expected to remain stable, supported by the continued expansion in economic activity and in the absence of strong demand pressures.”