Interest rate cut: Maybe next year

KUALA LUMPUR: Increased risks due to the uptick in Covid-19 infections and political bickering are not enough to prompt Bank Negara Malaysia to cut its key interest rate, economists said.

They said Bank Negara’s decision to retain the Overnight Policy Rate (OPR) at 1.75 per cent was in line with what the broad market had expected.

The decision was influenced by a significant improvement in economic activity in the third quarter (Q3), they added.

In deciding to maintain the interest rate at its Monetary Policy Committee (MPC) meeting yesterday, Bank Negara said the cumulative 125 basis points (bps) OPR reduction this year would continue to stimulate the economy.

OANDA senior market analyst for Asia Pacific Jeffrey Halley said the decision was expected as the central bank was keen to keep its powder dry on the interest rate front, leaving some firepower if the fourth quarter (Q4) activity turned down again.

“They will also have one eye on Friday’s 2021 Budget and subsequent vote. Also note that the government has little wiggle room on focal stimulus,” he told the New Straits Times (NST).

Halley added that Bank Negara had appeared to be “husbanding” its resources for further rainy days by leaving rates unchanged for now.

“Overall, the decision is modestly positive for the ringgit and neutral for equities although the banking sector may get a slight tailwind from it,” he said.

Halley said the weight would therefore fall on Bank Negara’s shoulders and monetary policy for economic stimulus.

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid said the interest rate would likely remain at 1.75 per cent throughout next year due to significant improvement of the local economy in Q3.

“Perhaps we could see positive growth in gross domestic product (GDP) during the September quarter albeit very marginal. The latest print in the Q3 2020 nominal trade balance saw a significant jump of 68 per cent compared to last year,” he told the NST.

In that sense, he said net exports were expected to contribute positively to GDP in Q3.

“Therefore, it makes sense to keep the OPR unchanged. Despite that, the option to cut the OPR lower is still visible,” he added.

Mohd Afzanizam said inflation would not be a threat and the economic recovery would still susceptible to Covid-19 infection.

“As such, Bank Negara will continue to be very vigilant and data dependent,” he added.

Sunway University Business School of Economics Professor Dr Yeah Kim Leng said the unchanged interest rate signalled that the financial condition in Malaysia remains stable and accommodative.

He said it was unnecessary to reduce interest rate to support the economy as the central bank was confident that the recovery momentum would not require further support from such cut.

“Malaysia’s interest rates remain positive but the effect on the unchanged OPR rate will likely be neutral on banks as they want to focus on ensuring their asset quality remains intact and not affected by the economic downturn, while reducing the loan delinquency,” he said.

Yeah said banks’ lending portfolio would be tailored towards the current demand to save their clients that have credit-worthy (the capacity to repay their borrowings).

OCBC Bank economist Wellian Wiranto said Bank Negara appeared to sound relatively sanguine on growth outlook, pointing out significant improvement in economic activity.

“Still, it continued to warn about downside risks to growth – not least due to the pandemic outbreaks. The central bank left the door open for a rate cut but it would depend on how the economic recovery shapes out in Q4 and beyond, as impact of global lockdowns and upcoming US election come through,” he said.

Wellian said Bank Negara was seeking to strike a balance on multiple fronts, adding that the outlook could be brighter despite the downside risks.

“The central bank would not hesitate to act by cutting its policy rate, if it deems that the downside risks it mentioned start to weigh on growth momentum more visibly,” he said.

In particular, he said if Q4 outturn gets impacted even more, either because of a slump in exports or an enforced shutdown of business activities, the central bank would be coming in fast.

“Even though the next MPC meeting will not take place until January 19 to 20, 2021 (as per the just-released schedule), if push comes to shove, there might even be an inter-meeting decision to cut as well, if necessary.”

He said both domestic virus fight and global economic and financial market developments post US-election would be the key determinants.

CGS-CIMB economist Michele Chia and Lim Yee Ping said the central bank was taking the stance that monetary policy was sufficiently calibrated.

“Therefore, we expect the OPR to remain unchanged at 1.75 per cent until end-2021. The burden of providing the next leg of economic stimulus lies with fiscal policy, with market attention turning to the tabling of 2021 Budget, which is likely to remain expansionary,” they said.

They said recovery in global demand, normalisation of public and private sector activity and policy support were sufficient to guide Malaysia’s GDP toward a target growth rate of 5.5 per cent to 8.0 per cent in 2021.

Source: NST