Bank Negara maintains OPR


PETALING JAYA: Malaysia has once again resisted an interest rate cut on the back of a resilient economy, even as key central banks in Asia Pacific have been slashing their benchmark rates recently.

In its latest Monetary Policy Statement (MPS) issued yesterday, Bank Negara maintained Malaysia’s overnight policy rate (OPR) at 3%, which was in line with market prediction.

In an earlier poll of 24 economists by Bloomberg, 16 expected the Malaysian central bank to keep the benchmark rate unchanged, while eight had forecast a 25-basis-point (bps) cut to 2.75%.

Speaking with StarBiz, Socio Economic Research Center (SERC) executive director Lee Heng Guie described Bank Negara’s neutral tone in its latest MPS as a sign of confidence in the economy.

Bank Negara has left the OPR unchanged in its recent Monetary Policy Committee (MPC) meeting and earlier in July.

However, in May this year, the central bank undertook a 25-bps cut from 3.25%, marking the first rate cut since July 2016.

Bank Negara said yesterday that its stance on monetary policy remains accommodative and supportive of economic activity at the current OPR level of 3%.

It also added that Malaysia’s resilient private spending and broad-based expansion in key economic sectors, alongside a stable labour market, wage growth and diversified exports, are expected to remain supportive of economic activity.

“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.

“Overall, the baseline growth projection for 2019 remains unchanged, within the range of 4.3%-4.8%. This projection, however, is subject to further downside risks from worsening trade tensions, uncertainties in the global and domestic environment, and extended weakness in commodity-related sectors, ” stated Bank Negara.

Year-to-date, the country’s average headline inflation is 0.3%.

Bank Negara said that headline inflation is projected to average higher for the remaining months of the year and into 2020. However, headline inflation is expected to remain low.

“This reflects the lapse in the impact of the consumption tax policy changes, the relatively subdued outlook on global oil prices, and policy measures in place to contain food prices.

“The trajectory of headline inflation will, however, be dependent on global oil and commodity price developments, ” it said.

Central banks in Thailand, Australia, New Zealand, India, Indonesia and the Philippines cut their key rates in August, as global growth continued to slow down amid the worsening US-China trade war.

Alliance Bank Malaysia Bhd chief economist Manokaran Mottain ruled out any potential rate cut by Bank Negara in the near term, as he expects economic growth to remain steady in the range of 4.5% to 4.7% in the third and fourth quarters of 2019.

“However, any changes to the OPR will be data-dependent, among which will look into the US-China trade war status.

“For now, it is unnecessary to cut the OPR unless the growth rate goes below 4%, ” said Manokaran.

However, AmBank Group chief economist Anthony Dass expects an OPR cut to take place in MPC’s next meeting in November. Earlier, he had predicted a 25-bps cut this month.

“Although the economy grew stronger to 4.9% in the second quarter of 2019, underlying sentiments have weakened, poor loan qualities have started to pick up slightly and loan growth has softened, all pointing to adequate room for a rate cut.

“But Bank Negara’s policy statement remained cautious on growth and less dovish. For a start, there was hardly any comment on the ‘downside risks’. It seems to be that they will adopt a ‘wait-and-see’ attitude and are likely to stay behind the rate cutting curve for sometime, ” he said.

Dass pointed out that the decision to maintain the OPR at 3% at a time when other economies are aggressively cutting rates could attract some capital flows into Malaysia.

“It is important to remember that capital flows are being influenced by the external environment and emerging markets, in which Malaysia tends to get hit when uncertainty picks up.

“With external noises still remaining loud, volatile capital markets remain, ” he said.

SERC’s Lee was asked whether the ringgit would be affected by the move to maintain the OPR at 3%, to which he said the impact would be “somewhat muted”.

“Our 2019 year-end estimate is RM4.15-RM4.20 per US dollar, ” he said.

Meanwhile, commenting on the bond market, Lee said that a rate cut has not been priced in amid concerns about moderating economic growth.

“The bond market saw some mild selling as the bond yields ticked slightly higher by two bps. The next policy risk event to watch is FTSE Russell’s decision whether to exclude Malaysian bonds from its World Government Bond Index on Sept 26.”

“Although the economy grew stronger to 4.9% in the second quarter of 2019, underlying sentiments have weakened, poor loan qualities have started to pick up slightly and loan growth has softened, all pointing to adequate room for a rate cut.

“But Bank Negara’s policy statement remained cautious on growth and less dovish. For a start, there was hardly any comment on the ‘downside risks’.

“It seems to be that they will adopt a ‘wait-and-see’ attitude and are likely to stay behind the rate cutting curve for sometime, ” he said.

Dass pointed out that the decision to maintain the OPR at 3% at a time when other economies are aggressively cutting rates could attract some capital flows into Malaysia.

“It is important to remember that capital flows are being influenced by the external environment and emerging markets, in which Malaysia tends to get hit when uncertainty picks up.

“With external noises still remaining loud, volatile capital markets remain, ” he said.

SERC’s Lee was asked whether the ringgit would be affected by the move to maintain the OPR at 3%, to which he said the impact would be “somewhat muted”.

“Our 2019 year-end estimate is RM4.15-RM4.20 per US dollar, ” he said.

Meanwhile, commenting on the bond market, Lee said that a rate cut has not been priced in amid concerns about moderating economic growth.

“The bond market saw some mild selling as the bond yields ticked slightly higher by two bps.

“The next policy risk event to watch is FTSE Russell’s decision whether to exclude Malaysian bonds from its World Government Bond Index on Sept 26.”


Banking , Bank Negara , overnight policy rate , OPR

   

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