Keeping the rate cut option

Bank Negara kept interest rates unchanged yesterday despite wide expectations there would be a 25-basis-point cut in the OPR. It also maintained the Statutory Reserve Requirement (SRR) ratio unchanged at 2% yesterday.

KUALA LUMPUR: Economists believe the door is open for Bank Negara to consider a rate cut this year despite the central bank keeping the overnight policy rate (OPR) at 1.75%.

Alliance Bank chief economist Manokaran Mottain was not surprised by the central bank’s decision to maintain the OPR at 1.75% and said that there was no urgency to cut the rate at the moment.

He explained that the movement control order (MCO 2.0) was only a week old and has yet to cast a significant impact on business and economic activities.

“Nevertheless, if the pandemic worsens and MCO 2.0 is extended to more than four weeks, we do not rule out a 25-basis-point rate cut in the next Monetary Policy Committee (MPC) meeting on March 4, ” he told StarBiz.

Axi chief global market strategist Stephen Innes expects the central bank to hold back cutting rates but would signal a rate cut later this year.

“That was my call and not surprised as Bank Negara is one of the more astute regional, if not global, bankers.

“The realisation that cutting interest rates when 85% of the economy is effectively in some type of MCO is not a great idea but keeping the door open until a vaccine (is administered) and mobility returns is a good one.

“I also think the decision was made a bit easier by the latest government stimulus event that took some of the pressure to ease, ” Innes said.

Bank Negara kept interest rates unchanged yesterday despite wide expectations there would be a 25-basis-point cut in the OPR. It also maintained the Statutory Reserve Requirement (SRR) ratio unchanged at 2% yesterday.

In its monetary policy statement, Bank Negara said the MPC considered the stance of monetary policy to be appropriate and accommodative.

“Given the uncertainties surrounding the pandemic, the stance of monetary policy going forward will be determined by new data and information, and their implications on the overall outlook for inflation and domestic growth.

“The bank remains committed to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery, ” it said.

Sunway University economics professor Yeah Kim Leng said the decision not to cut the OPR basically affirmed Bank Negara’s view that the current interest rate level is low and accommodative enough to support an economic recovery.

“It also reflects that it is too early to know with certainty that the newly imposed MCO will derail the growth trajectory expected this year.

“It’s a prudent decision to keep some ‘dry powder’, given the already-low interest rate level and the release of the latest fiscal assistance package, ” Yeah said.

Economists said unlike most other Asian central banks, which have almost exhausted their easing with rates hovering near zero, Bank Negara still has room to cut its policy rate further.

Bank Negara said the resurgence in Covid-19 cases and the introduction of targeted containment measures had affected the recovery momentum in the fourth quarter of 2020.

“As a result, growth for 2020 is expected to be near the lower end of the earlier forecast range.

“For 2021, while near-term growth will be affected by the re-introduction of stricter containment measures, the impact will be less severe than that experienced in 2020, ” it said.

However, Bank Negara said the growth trajectory was projected to improve from the second quarter onwards.

The improvement, it said, would be driven by the recovery in global demand, turnaround in public and private sector expenditure amid continued support from policy measures, as well as higher production from existing and new manufacturing and mining facilities.

The roll-out of vaccines in the coming months will also lift sentiment.

On the outlook for 2021, headline inflation is projected to average higher, primarily due to rising global oil prices, it said.

“Perhaps to counterbalance all that adrenaline rush, today’s (yesterday’s) Bank Negara decision has a decidedly staid air to it, ” OCBC Bank economist Wellian Wiranto (pic below) said.

He said even as Bank Negara acknowledged the hit from the MCO imposition on economic growth, it appeared to be a keen proponent of the idea that vaccination efforts can lift both economic activity and sentiment considerably.

“To be sure, it has left the door open for a rate cut, if such sanguine outlook takes a darker turn.

“The stance forward will be ‘determined by new data and information’ and it ‘remains committed to utilise its policy levers as appropriate’. That is central bank-speak for: a rate cut is still an option, but let’s leave it in the KIV tray, as we watch how the coming months shape out, ” Wellian said.

Center for Market Education CEO Dr Carmelo Ferlito (pic below) said the OPR at its current level is already pretty low and any further cuts may have pushed inflationary tendencies.

“In fact, from the inflation perspective, at the moment we experience contending trends: the Covid-19 crisis pushes for prices to go down while the different fiscal stimuli push in the opposite direction.

“If inflationary tendencies would prevail, purchasing power would be compromised during an already difficult moment. On the contrary, now we need purchasing power to be restored and savings to be rebuilt in order to grant the creation of funds available for investment, ” he said.

Ferlito is also sceptical over the general perspective that further OPR cut would be able to stimulate a country’s economic activity.

“Well, in the traditional way to think, a cut is intended to stimulate the economy but I doubt that at the present level of the OPR, as there would not be a significant difference between keeping the rate where it is or cutting it further, ” he said, adding that a cut would be seen as a signal and its consequences depend very much on how this signal is interpreted by market players.

“If it is interpreted as a signal of nervousness, then investors will remain on the ‘wait and see’. Not to mention that too low an OPR could eventually incentivise bad investments, ” Ferlito said.

Separately, UOB Malaysia senior economist Julia Goh believes Bank Negara is in a “wait-and-see” mode.

“Given the possibility of further extension of the current containment measures and potential downside risks, we maintain our view for a 25-basis-point OPR cut to 1.50% in the first quarter of 2021, ” she said.

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