PETALING JAYA, 18 July: A further cut in Bank Negara Malaysia’s Overnight Policy Rate (OPR) and a relaxation of property measures by year-end are possible, based on the central bank’s comment that risks to financial stability have receded, said Hong Leong Investment Bank Research (HLIB Research) economist Sia Ket Ee.
“While a rate cut does not seem imminent in the next Monetary Policy Committee (MPC) meeting after the governor’s interview, we still expect Bank Negara Malaysia (BNM) to be in ready mode to lend a helping hand in supporting domestic growth via monetary easing,” he said in a report last Friday.
“We still do not rule out the possibility of a further OPR cut and/or relaxation of property measures by year-end, especially after BNM said risks to financial stability have receded,” he added.
In his maiden media interview since his appointment on May 1, BNM governor Datuk Muhammad Ibrahim said the OPR cut on July 13 was a pre-emptive action to ensure that the economy is on a steady growth path.
In the interview with Bernama, Muhammad said the MPC had seized the “window of opportunity” of lower-than-expected inflation and receding financial imbalances to implement the rate cut to give a boost to the economy.
Even though he denied that the move is part of a series of rate cuts planned, the governor noted that the MPC members convene every meeting “with an open mind”.
“We view the interview as part of the communication strategies of BNM, which shares more insights after the unexpected OPR cut on Wednesday. The 25 basis points (bps) cut has triggered speculation in the market that further easing is in the cards,” said Sia.
“Three-year Malaysia Government Securities (MGS) yield nosedived by 15.7bps to 2.854% from 3.011% when the rate cut was announced. Ten-year MGS yield eased to 3.523% to 3.574%,” he added.
He said the ringgit strengthened further instead of the usual weakening bias after a rate cut. The ringgit strengthened to RM3.947 to a dollar from RM3.98 a day before the MPC meeting.
Sia said speculation of a rate cut has induced more capital inflows for positioning in the bond market.
“On growth prospects, we are comforted by the guidance by the governor that growth is expected to be stronger in 2H16. This is in line with our expectations of growth to stabilise in 2H16 on account of domestic demand support arising mainly from a continued recovery in consumption supported by measures to raise disposable income, and sustained pick-up in the construction sector,” he said.
The downside risk to HLIB Research’s forecast is slower-than-expected global growth which will throw off its export assumption. It maintained its 2016 gross domestic product growth forecast of 4.2% for Malaysia.