StanChart Research expects cut in Malaysia's interest rates

Malaysia

KUALA LUMPUR: Standard Chartered Research expects the Overnight Policy Rate (OPR) to be reduced by 25 basis points to 3% during the Monetary Policy Committee (MPC) meeting on Thursday.

It said on Wednesday its long-held view was that Bank Negara Malaysia (BNM) would cut the OPR to 3%.

“However, we see a high risk of delay, as the central bank maintained a neutral stance at its last meeting on March 9,” it said. 

StanChart Research said nevertheless a dovish signal, such as an adjustment of the “accommodative and supportive” phrase, will be sufficient to reflect a stronger growth bias. 

It said that BNM had maintained a neutral stance for three reasons. Firstly, monetary policy should not be seen as a silver bullet for growth; secondly, leverage is high and thirdly, growth is not as weak as other developed economies.
 
“Indeed, monetary policy is no silver bullet, and the effectiveness of major central banks’ ultra-low interest rates is debatable. But Malaysia’s policy rate is just 25bps off its historical high,” it said. 

StanChart Research said a tight fiscal policy may require more support from monetary policy. Moreover, BNM’s last decision on the OPR in July 2014 was to hike it by 25bps. 

“Growth conditions have weakened meaningfully since then, and the outlook remains challenging. For example, loan growth fell to 6.4% on-year in March, the lowest since 2007. 

“While growth may not be low versus other developed economies’, we believe it should be compared against Malaysia’s own potential growth. 

“Finally, we do not believe a 25bps cut will cause increased leverage. Given current conditions, we think a 25bps cut will help with debt servicing, rather than increase the financial imbalance,” it said.