Analysts mixed on further OPR reduction

Bank Negara Malaysia

KUALA LUMPUR: Analysts are mixed in their views on Bank Negara Malaysia’s (BNM) stance on the overnight policy rate (OPR) in the upcoming Monetary Policy Meeting on Wednesday.

Bank Islam Malaysia Bhd chief economist Dr Afzanizam Mohd Rashid said the central bank would likely reduce the OPR by 25 basis points during the meeting.

“We have seen that the number of new infections has yet to subside, leading to the reintroduction of movement control order (MCO) in key states for two weeks. This would result in output loss as human mobility is highly restrictive.

“What it means is that the present gross domestic product (GDP) forecast of 6.5 per cent to 7.5 per cent for 2021 looks pretty much unattainable,” he told Bernama. 

Therefore, the situation warrants more policy support, said Mohd Afzanizam, adding in that context, a reduction in the OPR and perhaps the Statutory Reserve Requirement (SRR) too could help to rejuvenate the growth trajectory expected in 2021.

The OPR currently stands at 1.75 per cent. BNM had reduced a cumulative 125 basis points in the OPR between January and July 2020.

According to the Ministry of Health, Malaysia recorded 3,339 new Covid-19 infections on Jan 17, down from the previous day’s 4,029 cases, bringing total confirmed infections in the country to 158,434.

Seven more deaths were recorded on Sunday comprising three from Selangor, two from Johor and one each in Negeri Sembilan and Kedah — which pushed the death toll past 600 to 601 or 0.83 per cent of total infections.

In light of the fluidity of the present situation, Mohd Afzanizam said further OPR cuts should not be totally ruled out.

“All eyes will be on the MCO and how long the measures would last and how soon the country would execute the vaccination programme that ultimately will determine the pace of the reopening of the economy,” he added.

On the possible impact of further OPR cut on banks, Mohd Afzanizam noted that in the past, net interest margin compression was unavoidable given the adjustment between the financing rates and deposit rates.

“The financing rates would be adjusted almost immediately for the variable financing contract while the fixed deposits would take some time to be adjusted lower. For example, the deposit rates will only be reset lower once the deposit has matured,” he added.

Meanwhile, Axi chief global market strategist Stephen Innes believed that BNM may hold back cutting rates now but would signal a rate cut later this year to better coordinate with the economic reopening with the availability of vaccines.

“There seems to be a building consensus for a rate cut due to the MCO’s reimposition as it will harm the economy. I think policy inputs, like interest rate cuts, are less effective during lockdown…but either way, I’m splitting hairs as a rate cut at any time will provide economic relief,” he told Bernama.

Innes said BNM had noted that Covid-19 resurgence as a risk and remained committed to utilising its policy levers to support a sustainable economic recovery.

He added that with recent mobility restrictions on 85 per cent of the economy with the reimplementation of MCO and conditional MCO, the toll on first-quarter GDP would be significant, and an interest rate cut remained a possibility.

“I was factoring in a rate cut later this year but if BNM makes a pre-emptive strike, I think it would be the one and done variety and not signal an easing policy, so the currency market will not react negatively,” he said.

Recently, Standard Chartered said BNM was likely to maintain the OPR in 2021 after 125 basis points rate cut in 2020 as the central bank appeared comfortable in maintaining its current stance.

OCBC Bank meanwhile said today it is expecting BNM to turn more downbeat on the OPR, noting a heightened chance of a rate cut of down to 1.5 per cent from the current 1.75 per cent. – Bernama