PETALING JAYA: Bank Negara Malaysia (BNM) is widely expected to cut the Overnight Policy Rate (OPR) at its Monetary Policy Committee (MPC) meeting tomorrow by at least 25bps in view of the country’s challenging economic outlook brought on by the Covid-19 pandemic and movement control order (MCO) period.
KAF Research senior economist Vincent Loo expects BNM to cut the OPR by 50bps tomorrow, noting that there may be more to follow in subsequent meetings. This is mainly because of the extremely weak economic environment due to the supply-demand shock resulting from the MCO measures and external headwinds amid weak global demand.
“The current crisis is unprecedented and the economy is currently hit on both the domestic and external fronts, which would result in a sharp economic contraction in H1’20. Given the low inflationary environment, the central bank’s objective should prioritise driving growth and providing a more accommodative monetary environment,“ he told SunBiz.
Loo said a lower policy rate can help reduce borrowers’ interest burden during this MCO period as well as accommodate consumption and investment to help stimulate an economic recovery after the MCO is lifted.
“A statutory reserve requirement (SRR) cut is also likely along with the reduction in OPR, which will help inject more liquidity into the banking system,“ he added.
Note that BNM had earlier cut the OPR in January and March by a total of 50bps to 2.5% currently. Based on history, the OPR did not go lower than 2% during the global financial crisis period.
UOB has penciled in another 50bps rate cut for the year given that broad risk to both gross domestic product and consumer price index growth remains tilted to the downside.
“We think that BNM will review the effectiveness of the front-loaded 50bps cut in its OPR in Q1’20 and RM260 billion fiscal package at tomorrow’s MPC meeting before deciding if further monetary adjustments are required to support the economy,” it said.
OCBC Treasury Research, however, is not fully convinced that tomorrow’s MPC meeting is a good time for a rate cut. It opined that BNM may just hold the OPR unchanged because the “same pill may not work for everyone every time”.
“For a while, especially during the heights of the market stress and massive cuts by the Fed in late March, we even thought BNM might well step in out-of-schedule to enact cuts. However, it opted to first cut the SRR on March 19 by 100bps to release RM30 billion of banking sector liquidity, and followed suit with a six-month loan moratorium announcement on March 24.
“The last measure, especially, has prompted us to rethink our assessment of the likelihood of rate cut. The main reason is that, with the loans moratorium, a vast majority of borrowers do not need to service their loans at all. Lower interest rates during the period would carry very little oomph in terms of actual transmission and also bring only a subdued boost to sentiment.
To be sure, since interests would still accrue on the loans amount during the period, a lower rate would bring lower total amount of loans outstanding, but the effect would be relatively minimal,“ reasoned OCBC.
Banks are already facing the spectre of a potential pick-up in non-performing loans. The moratorium also resulted in an absence of income streams coming in from loan servicing during the period.
“A rate cut now may bring about a more compressed interest margin for the banks, adding another layer of challenges for banks,” said the research house.
Another factor to consider is the reduced yield differential that a rate cut would bring now, and its potential impact on the currency. Given the net oil exporter status of Malaysia, the ringgit has had a relatively high correlation with oil price – and that is not a good thing when oil has been trading in the doldrums.
OCBC said if BNM indeed refrains from tweaking its policy rate for now, there are other measures that the central bank might still adopt to help the economy more than it already has.
“For one, another SRR cut to lower it from 2% now cannot be ruled out. While the central bank is usually at pains in stressing that SRR is an instrument to manage banking sector liquidity and not reflective of monetary policy stance, any easing there would nonetheless help the banking sector tide things over and improve sentiment.”
