Bank Negara’s move to cut OPR caught economists by surprise

By Ranjit Singh

BANK Negara Malaysia’s decision to cut the Overnight Policy Rate (OPR) by 25 basis points to 2.75% has caught many economists by surprise.

In a statement, the Monetary Policy Committee (MPC) said the ceiling and floor rates of the corridor of the OPR were correspondingly reduced to 3% and 2.5 %, respectively.

“The global economy continues to expand at a moderate pace. Latest indicators and the recent dissipation of trade tensions point to improving global trade activity.

“However, downside risks remain due to geopolitical tensions and policy uncertainties in a number of countries. This could cause a resurgence of financial market volatility and weigh on the global growth outlook,” said MPC.

Bank Islam Malaysia Bhd chief economist Afzanizam Abdul  Rashid told FocusM that the move by BNM was unexpected.

“We must admit that we were caught off-guard. We thought the decision would come in perhaps in May as BNM would want to wait for the FTSE Russell review in March. The central bank has indicated that it is a pre-emptive move to secure the improving growth trajectory amid price stability.

“It also said the current monetary stance is appropriate in sustaining economic growth with price stability. In other words, the central bank is very mindful on external developments and would be data-dependent in deciding its next course of action. We believe inflation is not an issue given that the government has decided to put on hold the targeted fuel subsidy programme indefinitely,” said Afzanizam.

Fuels and lubricating personal transport equipment accounted for 8.5% of total weight in the Consumer Price Index (CPI) whereby RON95 is also embedded in this category.

“Should RON95 prices remain at RM2.08 per litre in 2020, it could bring down the inflation rate to below 1%. Apart from that, the expected reduction in the toll rates on major highways could also help to ease the inflation rate during the year although the representation of tolls in the CPI is small, circa 0.4%,” added Afzanizam.

As such, he said room for additional OPR reduction is wide open. However, at this juncture, he believed that BNM would want to maintain the prevailing OPR throughout the year subject to the evolving economic outlook globally.

Alliance Bank Malaysia Bhd chief economist Manokaran Mottain said he only expected a rate cut by the central bank in the first quarter, possibly in March.

“The central bank has taken a pre-emptive measure to address the uncertainty in the global economy. The IMF and the World Bank have reduced their targets for global growth in 2020 as concerns persist and BNM has acted accordingly,” he said.

Headline inflation averaged 0.7% in 2019. In 2020, headline inflation is expected to average higher but remain modest. The trajectory of headline inflation will be dependent on global oil and commodity price developments and the timing of the lifting of the domestic retail fuel price ceilings. Underlying inflation is expected to remain broadly stable, reflecting the continued expansion in economic activity and the absence of strong demand pressures.

Malaysian Rating Corporation Bhd chief economist Nor Zahidi Alias said the move by BNM was primarily due to concerns over the uncertainties in the global economy.

“The reduction was primarily driven by global factors that could affect our growth trajectory in the near term. Despite the phase one trade deal sealed by the US and China recently, uncertainties will continue to emanate from future deals not only between the US and China, but also between the US and other countries (e.g. those in Europe).

“Prospects of re-escalation in geopolitical risks also cannot be ruled out especially after the recent political tension that erupted between US and Iran. All these would have an impact on global financial markets that could reverberate across Asia and affect an open economy like Malaysia.

Domestically, there is concern over the pace of investment growth especially at a time when consumer spending momentum is expected to moderate in the near term.  Our forecast for real GDP growth remains at 4.3% for 2020,” said Nor Zahidi. – Jan 22, 2020

 

 

 

 

 

 

 

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