PETALING JAYA: Malaysia may embark on another round of monetary easing next year, following in the footsteps of its regional peers and major economies globally.
Economists predict that an overnight policy rate (OPR) cut is imminent in 2020, considering the urgent need to rejuvenate local economic activities, even as the federal government has put in place an expansionary budget for next year.
The country’s business confidence in the third quarter of 2019 plunged to the lowest level since 2008, as measured by the Malaysian Institute of Economic Research. Consumer sentiment has also remained below the optimism threshold in the past several quarters.
Private-sector wage growth has been continuously slowing down since 2017, growing at only 3.8% in the third quarter of 2019 (3Q19) - nearly half the growth seen two years earlier.
Malaysia’s economic growth has also moderated in line with the global trend, remaining below 5% since 1Q18. The continuing US-China trade war, which has yet to achieve a solid resolution, has also dampened the global economic outlook, including Malaysia.
Amid such challenges, Bank Negara is seen as having ample room to adjust the OPR moving forward, as inflation is likely to remain mild despite an expected gradual recovery.
CGS-CIMB Research said in a note yesterday that it expects OPR to hit 2.5% by end-2020 from the current 3%, implying two rate cuts of 25 basis points (bps) each.
“Imputing the impact of higher fuel prices, we estimate the headline Consumer Price Index to tick up 1.9% in 2020, which to us, still represents a subdued inflation outlook. Moreover, core inflation is likely to remain weak, given deteriorating domestic demand drivers.
“Therefore, inflation is unlikely to be a roadblock should Bank Negara choose to loosen monetary policy to cushion the slowdown in Malaysia’s gross domestic product growth, ” it said.
UOB Malaysia Research foresees a 25-bps cut following the Monetary Policy Committee’s (MPC) meeting either in January or March 2020, to safeguard domestic growth amid lingering trade uncertainties and muted investments.
“The floating of the fuel pump prices on a gradual basis starting in January 2020, a planned upward adjustment in water tariffs nationwide and base effects would be key factors lifting inflation in 2020. We expect inflation to hover around 1.1% to 1.3% for the remaining two months of 2019, before edging up above 2% in 2020.
“Despite a higher inflation trajectory in 2020, inflation pressures are expected to be contained by moderate demand, as domestic economic growth is projected to slow below Malaysia’s potential output growth of 4.8% to 5% next year, ” the research house said, adding that this creates room for Bank Negara to cut the OPR.
Anthony Dass, the chief economist of AmBank Group, believes there is an 80% chance of a rate cut by the MPC in January 2020.
Meanwhile, Bank Islam chief economist Mohd Afzanizam Abdul Rashid recently told StarBiz that Bank Negara could likely introduce a one-time interest rate cut of 25bps to 2.75%, possibly in the first half of next year.
TA Securities Research opined that there is not much pressure for Bank Negara to cut the OPR immediately, as private-sector activities remain healthy.
“Furthermore, a pause in the US easing monetary policy as hinted in their last Federal Open Market Committee meeting will put the interest differential to remain wide at 125bps-150bps for the time being.
“That will be an advantage to our currency, thus foreign flows going forward, ” the research house said. Major central banks across the world have been slashing their key interest rates in order to buttress the slowing economic pace and encourage borrowings.
As recent as Nov 20, the People’s Bank of China cut its new benchmark lending rates, namely the one-year and five-year loan prime rates (LPR), by five bps.
The US Federal Reserve has also cut its federal funds rate three times in 2019, bringing the latest figure to a range of 1.5% to 1.75%.
India, on the other hand, has slashed its benchmark repurchase rate five times this year.
In the South-East Asian region, Bank Negara was the first central bank to initiate monetary easing in 2019. For context, Bank Negara’s MPC had reduced the benchmark OPR on May 7 this year, the first downward revision since July 2016.
The MPC has avoided a rate cut in its subsequent meetings in July, September and November. However, on Nov 8, Bank Negara lowered the Statutory Reserve Requirement (SRR) ratio to 3% from 3.5% effective Nov 16.
It has clarified that the SRR is an instrument to manage liquidity in the domestic financial system and is not a signal on the central bank’s stance of monetary policy.
Other countries in the region have been more active in cutting their policy rates such as Indonesia and the Philippines, which have reduced rates by four and three times respectively this year.
Thailand, on the other hand, has reduced its key rate two times to a record low of 1.25%.