Room for another key rate cut by Bank Negara, say economists

KUALA LUMPUR (Sept 7): Although the central bank’s governor indicated in July that the Bank Negara Malaysia (BNM) has no plans to cut the key rate further in the next few monetary policy meetings this year, economists argue there is still room for another round of easing.

BNM’s monetary policy committee (MPC) is due to issue a statement later today and though UOB Malaysia economist Julia Goh believes another announcement of an imminent cut is unlikely, she said there is a case for BNM to ease rates further, given the country’s slower growth amid low inflation.

Malaysia’s inflation in July fell to 1.1%, the lowest seen since March last year. The country’s economic growth slowed to 4.1% in the first half of 2016, compared with the 5.3% growth seen in the same period last year.

“Though household debt stays high, we have seen overall loans growth easing and BNM has acknowledged that the risks of destabilising financial imbalances have receded. I think the main concern for BNM now is managing growth risks and ensuring a stable path of growth above all else,” she said in an email response to The Edge Financial Daily.

It is important that BNM not use all its monetary bullets at this stage, and to preserve sufficient monetary ammunition should a bigger downturn occur, she said.

“The OPR (overnight policy rate) fell to 2% in 2009 during the last global financial crisis, [and] bearing in mind that we are not in a crisis mode now, BNM communicated that the OPR adjustment in July was a pre-emptive move intended to ensure that the Malaysian economy continues on a steady growth path amid stable inflation.

“Doing two rate cuts in a row, when other regional central banks have, in the current period, maintained the status quo, could send the signal that the economy is much weaker than thought,” said Goh.

Further, Goh expects Budget 2017, which is slated to be tabled by the prime minister on Oct 21, will contain some stimulus measures. So BNM will likely keep the key at 3% at today’s meeting before evaluating the need for further easing in November, said Goh.

In an interview with Bernama later that same month, BNM governor Datuk Muhammad Ibrahim said the MPC has no plans to change the interest rates again over the next few meetings, though he stressed that the central bank would keep assessing the data to see what needs to be done.

In a Sept 5 note, HSBC Global Research said BNM can afford one more 25-basis-point rate cut this year, as inflation is currently below the central bank’s comfort range of 2% to 3%. “We think [inflation rates] are likely to stay that way for most of the remainder of 2016, as food price inflation is relatively stable at around 3.5% to 4.5% on year, while transport prices — also a significant component in the Consumer Price Index basket — continue to decline on year. We think BNM also has scope to ease a little more, given that inflation is currently so low,” the firm wrote.

HSBC cautioned that BNM needs to be extremely judicious in its easing, as too aggressive an approach could leave it vulnerable to capital outflows, which might be challenging to manage.

“Relative to the rest of Asia, BNM’s foreign exchange reserves remain one of the thinnest when measured against indicators such as M2 money supply and short-term external debt.

“This suggests that, in the event of further spikes in global risk aversion, BNM may have a less-than-desirable level of control over capital outflows and the ringgit. In the event, interest rate differentials, as well as real yields, could start to matter,” said HSBC.

The firm also noted that although BNM’s monetary policy statement in July was not categorically dovish as it did not shut the door on further easing either. “To this end, we pencil in one more 25-basis-point cut at the Sept 7 meeting, taking the OPR to 2.75%. Should BNM not deliver this rate cut as we expect, the arguments for further policy accommodation remain, and a cut at the Nov 23 meeting cannot be ruled out,” said HSBC.

In an email reply, JF Apex Securities Research economist Norsyafina Mohamad Zubir said another OPR rate cut, if it takes place, “would not render significant impact in the near term as it only reduces monthly instalment of loan payments by merely 1% to 2%”.

This article first appeared in The Edge Financial Daily, on Sept 7, 2016. Subscribe to The Edge Financial Daily here.

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