KUCHING: Due to weak external factors, analysts believe that Bank Negara Malaysia (BNM) will need to stimulate domestic economic activity via easing monetary policy in order to support Malaysia economy.
MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) in a report said due to uncertainties arising from Brexit, it expects two rate cuts in September and November 2016 by BNM.
“We have previously expected one rate cut by 25 basis points (bps) in September 2016 by BNM, as the weak global trade activity could warrant BNM to support domestic economy via easing monetary policy.
“However, as Brexit is likely to cause further slowdown in the global economy, we are revising our overnight policy rate (OPR) forecast to 2.75 per cent by year-end 2016, reflecting two rate cuts in September and November 2016 by 25bps each,” it said.
Meanwhile, the research house noted that it has also revised its forecast on the ringgit against the dollar.
“Recall that last year, ringgit has been depreciating against US dollar as investors were expecting the Fed will begin increasing its benchmark interest rate last year.
“Although the pace of rate hike has been slower than what was initially expected, the expectation that US Federal Reserve would tighten their interest rate gradually remains.
“However, since the European Union (EU) Referendum decided on a Brexit, traders are no longer expecting the Fed to increase their interest rate this year.
“We believe investors will once again rebalance their portfolio into emerging market economies, leading to appreciation of ringgit. As such, we are revising our year-end ringgit forecast to RM3.95 per US dollar,” it explained.
Aside from that, MIDF Research noted that Malaysia’s leading indicator has fallenl deeper into the red, shrinking by 2.6 per cent year-on-year (y-o-y).
“At the moment, Malaysia’s leading indicator continues its downward decline into negative territory – to a level similar to the pre-recession level in 1997, 2000 and 2008.
“However, the main difference lies with the gradual decline as compared to the sharp decline seen in the previous crisis.
“We believe that a prolonged economic slowdown is likely; hence we are revising our gross domestic product (GDP) forecast for the second quarter 2016 (2Q16) from 4.2 per cent to 3.9 per cent and for the full year 2016 from 4.4 per cent to four per cent,” it opined.
As for Malaysia’s inflation, it noted that the rate has been generally in line with expectations at two per cent. Hence, it retained its inflation forecast for the year 2016 at 2.6 per cent.
“Overall, the global economic outlook is becoming dimmer due to various economic and political uncertainties.
“It is expected that many businesses will opt a ‘wait and see’ approach, leading to stagnancy in the economy,” MIDF Research commented.