Fitch Solutions sees Bank Negara cutting OPR to 1%

KUALA LUMPUR: Fitch Solutions Country Risk & Industry Research expects the Overnight Policy Rate (OPR) to be cut to 1.00% by the end of 2020.

It said monetary easing is the clear option to support an ailing Malaysian economy, especially as the government is facing tough fiscal constraints.

“We at Fitch Solutions continue to expect accelerated monetary easing in 2020 by Bank Negara Malaysia (BNM) and thus, revise our 2020 OPR forecast to 1.00%, from 1.50% previously,” it said in a statement.

This follows the central bank’s decision to cut the OPR by 50bps to 2.00% on May 5.

Fitch Solutions said Malaysia’s economy had become even more fragile since our last monetary policy assessment, given the burden of lockdown leaving only essential services and grocery outlets open that had lasted for around a month and a half between March 18 and May 4.

It noted that the government has very limited fiscal space, exacerbated by low oil prices, to further support the economy, which makes monetary easing an even more important part of resisting the economic headwinds due to Covid-19.

“We do not expect inflation to be a large obstacle to further monetary easing. While there are risks of supply chain disruptions causing a spike in food prices which could see inflation rise, the dim prospect for non-food price pressures arising particularly from a poor oil price outlook, is likely to keep overall inflation manageable,” it said.

Fitch Solution said with the US Federal Reserve having cut its Funds Rate to a range of 0-0.25% in March, Malaysia now has an even wider policy rate advantage of close to 200bps, which leaves much more room for it to cut further in order to support the economy

“Like BNM, we see dire economic conditions over the coming months, even as the government is beginning to ease lockdown restrictions and we expect deeper rate cuts still to support the economy,” it said, adding that the global economy has taken a distinct turn for the worse since its last rate forecast.

“We now expect a full year contraction of around 3.0% in 2020, compared to growth of 1.5% previously in early March,” it said.

“External demand is likely to remain depressed over the coming months as a result. Indeed, important trading partners of Malaysia such as Singapore and China, are likely to experience significant slowdowns this year, and we expect full year growth rates of -2.8% and 1.1%, respectively, in 2020.”