KUALA LUMPUR: There is room for Bank Negara Malaysia (BNM) to reduce the Overnight Policy Rate (OPR) as domestic money supply growth is declining and the US Federal Reserve is adopting a stagnant rate stance, said Malaysian Institute of Economic Research (MIER) senior research fellow Dr Zulkiply Omar.
BNM has maintained the OPR at 3.25% since January 2018. It is widely expected that the central bank will cut the key rate within the year as the economic growth moderates.
Speaking at MIER’s 24th Corporate Economic Briefing here today, Zulkiply said the rate cut expectation is further supported by negative sentiment on domestic production and consumption due to the weak ringgit, which was pressured by the massive short-term capital outflow of RM44.4 billion last year.
Nonetheless, he said the pressure on the ringgit has diminished following the stable US interest rates, which have helped reduce the volatility of hot money flows.
With the increase in BNM’s international reserves to US$103 billion (RM423.3 billion) on March 29, 2019, he said this indicates that the ringgit has been strengthening after declining for four quarters in a row in 2018.
Looking ahead, he opined that the ringgit will remain stable and is unlikely to weaken further following the Fed’s dovish stance.
The ringgit weakened 0.51% to 4.1305 against the greenback as at 5pm today.
Meanwhile, MIER executive director Emeritus Professor Datuk Dr Zakariah Abdul Rashid has proposed income policy to tackle deflation, apart from monetary and fiscal policies.
“When we increase income, we don’t have to worry about the increase in prices that will result in a reduction in consumer purchasing power. In fact, that’s the effect that we want. We want prices to go up, which are better and will stimulate demand and give incentives for people to work.”
He said fiscal policy may have its limitation as the government is faced with public debt problems, while the monetary policy is restrictive, having to consider interest rate differentials between Malaysia and the US.
MIER is maintaining its 2019 gross domestic product (GDP) growth projection for Malaysia at 4.5% on less encouraging domestic and external factors. This compares with BNM’s estimate of 4.3% to 4.8% growth.
On a separate note, Zakariah said Malaysia’s trade with China could take a hit due to the protracted trade war between the US and China. This is based on the RM178 billion trade between Malaysia and China in 2017.
The economic impact will cover over 550,000 employees, RM53 billion of value added production and RM769 million in taxes.
However, Zakariah reiterated that MIER has not detected a diversion in trade between Malaysia and China, since the start of the US-China dispute.
Hypothetically speaking, Zakariah said, the trade spat between the world’s two largest economies will definitely affect Malaysia, due to the spillover effect.
However, so far, for 2017 and 2018, the numbers for Malaysia’s imports from and exports to China have not declined, he added.
In 2017, Malaysia’s exports to China amounted to US$29 billion, and imports from that country totalled US$38 billion.