Fitch Solutions sees Bank Negara cutting OPR by 25bps in 2020

  • Economy
  • Wednesday, 06 Nov 2019

Fitch Solutions said slowing growth as a result of external headwinds, benign inflation on a soft oil price outlook, as well as a widening policy rate advantage against the US supply the motivation and space for a 25bps cut in 2020.

KUALA LUMPUR: Fitch Solutions Macro Research forecasts Bank Negara Malaysia's Monetary Policy Committee (MPC) will reduce the overnight policy rate (OPR) by 25 basis points next year.

It said on Wednesday it expected the OPR to be reduced to 2.75% next year after the MPC's decision to hold at 3% at its final MPC meeting the previous day.

“Slowing growth as a result of external headwinds, benign inflation on a soft oil price outlook, as well as a widening policy rate advantage against the US supply the motivation and space for a 25bps cut in 2020, ” it said.

Fitch Solutions also said Malaysia now has a wider policy rate advantage against the US, where the Federal Reserve cut the Funds Rate by a further 25bps on Oct 30 to 1.50%-1.75%, giving the MPC more space to cut and support the economy.

It said the MPC's more dovish tone that it saw from the previous statement was also featured in the latest statement as well.

Bank Negara still sees “geopolitical tensions, policy uncertainty and the unresolved trade disputes” as the key risks to the global economy and expects “exports will continue to be affected by slower global demand”.

Bank Negara also still expects headline inflation to “average higher but remain modest” reflecting the “relatively subdued outlook on global oil prices”.

Fitch Solutions forecast real GDP growth to slow slightly to 4.5% in 2020, compared to its 4.6% forecast for 2019 and this was largely due to its less sanguine view on the prospects for a comprehensive and lasting resolution to the US-China Trade War, despite recent signs of a thaw in trade relations.

Gross fixed capital formation is likely to benefit as a result of the trade war, with businesses increasingly relocating away from China to Southeast Asia.

“However, 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. As such, we believe that the overall drag on growth from a sluggish external sector is likely to outweigh the upside to investment, ” it said.

Fitch Solutions continue to forecast consumer price inflation (CPI) to average 1.5% on-year in 2020.

While in 2019, where inflation has averaged just 0.6% y-o-y in the firs tnine months of the year, is a low base from which price growth is likely to recover in 20 20, the soft outlook for oil prices is likely to keep a lid on price pres sures.

Its oil and gas team expects oil prices to decline further, forecasting average prices of US$62 per barrel and US$58 in 2020 and 2021, res pectively, vers us the 2019 year-to-date average of US$64.13.

“This is likely to negate the inflationary effect of the government’s decision, announced during the tabling of Budget 2020 in October, to make fuel subsidies less generous and more targeted, eschewing a blanket price cap in favour of handouts to means-tested households.

“Finally, although we do not expect further rate cuts from the Fed in 2019 nor 2020, the policy rate differential has widened significantly to 125bps against the upper bound of the Funds Rate, compared to just 50 bps at the midpoint of 2019.

“Together with benign inflation in 2020, the differential provides ample space for Bank Negara to cut rates by another 25bps sometime in 2020 to support the economy amid an uncertain external environment, ” it said.

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