PETALING JAYA: Fitch Solutions Macro Research said it is maintaining its overnight policy rate forecast at 2.75% for 2020, as the 25 basis point cut announced by Bank Negara Malaysia (BNM) is likely to prove sufficiently supportive of the economy.
In a statement today, Fitch Solutions said it believes the Malaysian economy is only going to see a very slight slowdown in 2020, and oil prices are on a sounder footing which will increase inflationary pressures.
It also reiterated its real GDP growth forecast at 4.5%, marking a slight slowdown from its 4.6% forecast for 2019.
“Notwithstanding the signing of the ‘Phase-One’ trade deal between China and the US, we still see high risks of a re-escalation in trade tensions.
“Gross fixed capital formation is still likely to pick up, as the trend of businesses increasingly relocating away from China to Southeast Asia is unlikely to have been reversed by the ‘Phase-One’ deal given the uncertainty that still remains over its implementation and further deals,” it said.
The research house also said the benefits to Malaysian exports implied by this trend are likely to take some time to feed through and not be in play in 2020, and as such, it believes the overall drag on growth from a sluggish external sector is likely to outweigh the upside to investment.
However, Fitch Solutions revised its average consumer price inflation (CPI) forecast upwards to 1.8% year-on-year (yoy) for 2020, from 1.5% yoy previously, due primarily to its slightly bullish view on oil prices.
“The price forecast of US$65/bbl implies some upside from spot prices of US$62.80/bbl on Jan 23. This revision was taken in light of elevated geopolitical risks in the Middle East and improving market sentiment, which would buoy prices despite the fundamental outlook remaining bearish,” it said.
On the other hand, higher oil prices on average would see the inflationary effect of the government’s decision to abolish price caps on petrol in favour of handouts to means-tested households.
Fitch Solutions cautioned that the downside risk of the Wuhan coronavirus still remained, with an epidemic likely to negatively affect economic growth in the region as a whole, much like the SARS epidemic in 2002-2003, which could see the central bank cut rates further.
