PETALING JAYA: Bank Negara, the first central bank in South-East Asia to start monetary easing this year, is unlikely to slash its benchmark interest rate.
The central bank is expected to leave its overnight policy rate (OPR) unchanged at 3% which may encourage the increase in foreign fund flows particularly into bonds and sukuk.
Alliance Bank Malaysia Bhd chief economist Manokaran Mottain told StarBiz that the country could enjoy a “widened interest rate differential” compared with the Federal Reserve’s (Fed) federal funds rate if Bank Negara retained its OPR.
“Following the recent rate cut by the Fed to 1.5%-1.75% and with Malaysia’s interest rate being at 3%, the difference in interest rates has increased to 125 to 150 basis points (bps).
“This would make the Malaysian bond market more attractive to foreign investors since our returns are higher now, given the widened interest rate differential. This means we can expect more foreign funds in portfolio investments, ” he pointed out.
While several other regional central banks have been aggressively cutting rates, including Indonesia which lowered its key interest rate for four straight months, many pundits believed that Bank Negara might be saving its ammunition in the event the economy continues to slow down in the coming quarters.
A total of 64% or 16 of the economists polled by Bloomberg expected the central bank to retain the OPR at 3%, ahead of the Monetary Policy Committee (MPC) meeting today. Nine other economists have projected a 25-bps cut to 2.75%.
Meanwhile, a poll by Reuters showed that eight out of 11 economists have forecast Bank Negara holding the OPR steady at 3%. Three economists, on the other hand, anticipated a rate cut of 25bps to 2.75%.
According to Standard Chartered Global Research, Bank Negara will likely adopt a “wait-and-see” stance and maintain the OPR.
The research house said the central bank has room to calibrate its policy response, given the country’s resilient economic growth.
It is worth noting that the Malaysian economy has outperformed market predictions in the past three quarters since the fourth quarter of 2018 (4Q18).
The country’s gross domestic product (GDP) grew by 4.7%, 4.5% and 4.9% in 4Q18,1Q19 and 2Q19, respectively.
“We will watch for Bank Negara’s view on how domestic conditions have evolved since the latest meeting, given that the domestic economy’s resilience has been the primary growth driver for the past few quarters.
“Private consumption faces a high base effect in the second half, however, with credit growth showing signs of easing. Loans disbursed to households fell 0.8% year-on-year (y-o-y) three-month moving average in August from a high of 11.1% y-o-y during the same period a year ago due to the ‘tax holiday’, ” it said.Alliance Bank’s Manokaran said there was no urgency to review the OPR during the meeting, as most of the country’s economic fundamentals remained strong.
“Of course, concerns on the trade war between the United States and China remain and present a risk to the economy. Export-wise, there could be some weakness ahead, but it won’t be similar to the kind of negative performance during the 2008/2009 global economic crisis. We expect the GDP to grow by 4.7% in 3Q19. While this will be slightly lower than the second-quarter growth, the economy continues to be resilient.
“Given such conditions, I don’t see a reason for a rate cut in the MPC meeting, ” he said.
Manokaran, however, expected Bank Negara to lower the OPR in the first MPC meeting of 2020.
Taking a contrasting standpoint, Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid has forecast a 25-bps cut in the OPR, largely driven by the concerns on the weakening external front.
“We have seen the 3Q19 GDP in the United States, China and Singapore being weak. The latest export numbers also suggest that Malaysia’s external demand does not have a rosy picture when it fell 6.8% y-o-y in September. Not to mention the steep fall in MIER’s Business Condition Index from 94.2 points in 2Q19 to 69 points in 3Q19.
“This would mean that businesses would put on hold their expansion plans and focus more on productivity and cost-cutting measures to maintain a reasonable level of profitability. Similarly, the consumer sentiment index fell to 84 points in 3Q19 from 93 points in the preceding quarter. Consumers are likely to revisit their spending plans in view of the economic uncertainties.
“As such, the business case for a lower OPR is building up. Apart from that, the timing of an OPR cut is also crucial since the effect of monetary easing would take some time to be felt. The sooner the OPR cut, the better it would be for the economy, ” he said.
Asked whether a cut in the OPR would severely affect the ringgit, Mohd Afzanizam said it was unlikely, given that the United States has already cut its federal funds rate.
“From an interest rate parity condition, our rate is higher than the United States. In that sense, the US dollar-ringgit exchange rate should remain intact, ” he said.
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