Boost to Malaysia's GDP

  • Economy
  • Friday, 24 Jan 2020

OPR adjustments

PETALING JAYA: Bank Negara appears to be focused on boosting gross domestic product (GDP) growth with the surprise cut in the overnight policy rate (OPR) on Wednesday.

This is attributable to the downside risks to growth that are still present globally with the ongoing trade negotiations between the United States and China, according to economists.

“The adjustment in the OPR is a pre-emptive measure to protect growth, given the escalating growth risks.

“Of particular concern is the uncertainty caused by the ongoing trade negotiations and the delay in the implementation of certain projects, ” PublicInvest Research said in its report.

“Bank Negara is putting growth at the forefront as inflation may take a hit with this latest policy movement, given the likely pullback in the ringgit, ” it added.

However, not everyone thinks the ringgit will pullback as assumed. Oanda Corp’s Asia Pacific senior market analyst Jeffrey Halley said the recent rally in the ringgit had given room for Bank Negara to cut rates.

The ringgit had a muted impact on the OPR rate cut and, at press time, was trading nearly flat from the previous day at 4.0687 to the US dollar.

AxiCorp’s chief market strategist Stephen Innes said, in his report, that ringgit inflows are expected to pick up after the Lunar New Year when the market returns focus to the ‘phase one’ trade deal, which marked a modest but promising start to lower US-China trade tensions.

“Hopefully, the coronavirus outbreak might not be so negatively impacting as on first blush, ” Innes said.

Meanwhile, PublicInvest believes that growth prospects for the country remain steady, underpinned by resilient private-sector spending amid a broad-based expansion in key economic sectors.

“The growth drivers will continue to be supported by stable labour market conditions, wage growth and capacity expansion. Support from the external sector could improve amid the de-escalation of trade tensions following the breakthrough in US and China trade negotiations recently, ” it said.

It also expected GDP growth to rebound mildly to 4.8% in 2020 from an estimated 4.7% in the previous year.

Meanwhile, Kenanga Research said Bank Negara’s actions pointed to the domestic economy remaining weak and that it would like to ensure that it would not slow further this year.

“Nonetheless, we expect GDP growth to slow to an estimated 4.0% in the fourth quarter of 2019 which would bring about full-year growth to 4.5%, short of the official target of 4.7%, ” Kenanga Research said.

“Given the abating growth momentum, we forecast GDP growth to slow further in the first quarter of 2020 to 3.8%, which may partly explain why Bank Negara had decided to cut the OPR, ” it added.

It also noted the risks to growth from the spread of the coronavirus from Wuhan, China which were not mentioned in the monetary policy statement.

“We suspect the growing concern might have partly influenced and hasten Bank Negara’s decision to cut this round. This is reminisced of the SARS outbreak in 2003, whereby the central bank had decided to cut the intervention rate by as much as 50 bps to support the economy and the government pumped in RM7.3bil to support the tourism, retail and transport services sector, ” Kenanga Research said.

Both Kenanga and PublicInvest Research said that there is a possibility of further OPR cuts in the later part of the year.

But for the time being, the central bank has signalled a pause, Kenanga said, citing the wordings in the monetary policy statement.

Meanwhile, Maybank Research said the tone from the latest monetary policy statement had signalled a “mixed” view for the economy.

Bank Negara’s cut to the OPR by 25 basis points (bps) to 2.75% at the MPC meeting follows a recent OPR cut of 25 bps in May 2019 and a further 50bps cut in Statutory Reserve Requirement (SRR) in November 2019.

Maybank Research said it expected a 25 bps OPR cut this year and had expected it in the March 2020 monetary policy committee meeting.

“We are expecting no OPR change this year, ” the research house said.

Maybank Research cited its expectations on the monetary policy statement which said that the OPR cut is a pre-emptive move to secure improving growth trajectory, and that current monetary policy stance is appropriate in sustaining economic growth.

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