BNM’s statement should signal to the market that it remains open to further rate cuts. — AFP photo
KUCHING: Amidst a slowing economic outlook, analysts across the board believe a third cut in the Overnight Policy Rate (OPR) is a distinct possibility within the first half of the year.
This comes after the widely-anticipated second OPR cut was made by Bank Negara Malaysia (BNM) on Tuesday – bringing the OPR to 2.50 basis points, its lowest seen in 10 years.
This was a move deemed necessary to combat the tough environment brought about by the Covid-19 virus followed by the breakup of the governing coalition with all its ensuing political drama.
Economist Wellian Wiranto of OCBC Treasury Research saiw while BNM tries to play up the potential for a rebound in the second half of the year (2H), its focus on downside risks is inescapable, from virus outbreak to commodities supply weakness.
“Even though the political situation was conspicuously absent from the statement, it must have weighed on the Monetary Policy Committee members’ minds, as well,” he said in a statement following the cut.
“Given the double whammy of potential hits to the economy coming from the virus and the politics, it is hardly surprising then that the central bank has opted to cut its OPR by 25bps to 2.5 per cent, in a rare back-to-back move following January’s trim. This is a level last seen a decade ago.
“Perhaps at least equally important to the consideration of the landscape ahead has been the political uncertainties afflicting Malaysia over the last 10 days or so. While the drama has been conspicuously absent from the statement, it must have featured in the decision to cut rate as well, given the inadvertent hit to business and consumer confidence when the timing could not have been worse.
Overall, Wellian said BNM’s statement – with its repeated focus on near-term downside risks, even if it tries to strike a confident tone on H2 outlook – should signal to the market that it remains open to further rate cuts.
“We think at least one more rate cut is in the pipeline, potentially coming as soon as the next meeting in May, especially if either or both of the virus and political concerns continue to weigh on growth.
“Of course, if the Fed cuts rate in the coming weeks, the odds of BNM cutting rate for a third time this year would go up considerably as well.”
The economist team at AmBank Research believed the drag on the economy could continue into 2Q2020.
“Much depends on the severity of the coronavirus impact that is already disrupting global supply chains and shipping. It is impacting exports and imports, thus already hurting manufacturing production and affecting services.
“In containing the downside risk of the economy, much depends on how fast the government will be able to roll out the stimulus measures and Budget 2020 initiatives.
“Besides, another 25bps rate cut is still on the table should there be a need to support private expenditure and help ease upwards pressure on non-performing loans.
“Room for lowering the SRR by 50bps remains. By freeing up 50bps, it would inject around RM8–9 billion which could be injected into the Special Investment Fund to aid SME businesses.”
AllianceDBS Research Sdn Bhd (AllianceDBS Research) observed that regional central banks are also contemplating further monetary easing to cope with the Covid-19 outbreak.
“For example, the US Federal Reserve is widely expected to implement three cuts for its Federal Reserve funds rate this year, and Bank of Japan aims to ensure sustainable liquidity and stability in the financial markets durign their March 18-19 meeting.
“March’s OPR reduction marks the second cut for the year, but we do not rule out another rate cut during the second half of 2020, if Malaysia’s economic conditions continue to worsen on the back of the potential escalation of the Covid-19 outbreak, unsettling domestic political tensions and the unresolved trade war between the US and China.”