PETALING JAYA: Fitch Solutions expects Bank Negara to slash its overnight policy rate (OPR) by another 100 basis points (bps) by the end of this year, on top of the 100bps already cut just in the first five months of 2020.
In anticipation of the central bank’s “accelerated monetary easing” in 2020, Fitch Solutions said the OPR could hit 1%, which would be the new record low in Malaysia’s monetary policy history.
Currently, the OPR – which is the benchmark rate for the Malaysian banking system’s loans and financings – stands at 2%, following the latest 50bps cut on May 5.
“Monetary easing is the clear option to support an ailing Malaysian economy, especially as the government is facing tough fiscal constraints.
“Inflation is likely to remain very low and could even flip into sustained deflation over the coming months, which strengthens the argument for further easing, ” it said in a note.
In addition, given that the US Federal Reserve had cut its federal fund rate to a range of 0%-0.25% in March, Fitch Solutions said Malaysia now has an even wider policy rate advantage of close to 200bps.
Hence, this creates more room for the OPR to be adjusted downwards in order to support the economy.
“Given that easing by cutting the OPR does not have a very long runway left and given risks that the Covid-19 pandemic could be a long-drawn affair depending on the efficacy of the response mounted by individual countries, we believe Bank Negara will have to consider other forms of monetary easing to supplement its toolkit.
“Indeed, we expect the central bank to increasingly pursue easing through the relaxation of macro-prudential measures over the coming months, following its decision to cut the reserve requirement ratio in March, ” it said.
In a separate comment, AmBank Group chief economist Anthony Dass (pic, above) concurred that there are chances for Bank Negara to cut its OPR further in 2020.
However, such a move by the central bank will be subject to how the economy crafts out in the second half of this year.
“Much will depend on the transmission effects of the latest cut on the economy – how effective it is on spending, containing non-performing loans (NPLs) and supporting loan growth, especially after the moratorium period. Also, any decision on more cuts is possible if the downside risk on the economy remains high, ” he said in a note.
Given that the inflation outlook for 2020 remains weak, at between 0.3% and minus 1.5%, Dass said this suggested there is ample room for more rate cuts, if necessary.
On the latest rate cut on May 5, Dass said it was justifiable as the economy is expected to contract sharply in the first half of 2020 due to Covid-19 outbreak and the movement control order (MCO) containment measures.
“Nevertheless, the fiscal stimulus measures, the easing of the MCO and the gradual improvement on the global front in the second half of 2020 should see the economy slowly coming out of the woods.
“Lower interest rates would potentially entice consumers to return to the market and purchase items like property and automobiles although the number of transactions may not be significant in the third quarter of 2020.
“However, as the confidence level improves, pent-up demand is expected to pick up, ” Dass said.
He expects the economy to see a gradual recovery in the third quarter of this year, with further improvement in the fourth quarter.
On the announcement by Bank Negara that banks may use Malaysian Government Securities and Malaysian Government Investment Issues to meet statutory reserve requirements from May 16 onwards, Dass views it as a positive move.
The central bank’s decision is expected to release RM16bil worth of liquidity into the banking system.
According to Dass, it also bodes well for the bond market as more issuances are expected in order to finance the fiscal stimulus, projected at RM145bil.
“Also, it should help banks as they shoulder the burden of the loan moratorium and face the potential risk of rising NPLs. With the rate cut, banks’ net interest margins (NIMs) will be further compressed as well.
“Hence, the 50bps cut should see both NIMs and earnings to be impacted by 4bps to 8bps and 2% to 6%, respectively, ” he said.