Malaysia cuts OPR rate to 3.00% against expectations
May Monetary Policy Committee – Overnight Policy Rate cut by 25bp
- OPR cut by 25bp to 3.00% against our expectations of a hold in May.
- Tightening domestic financial conditions and concerns over downside risks to the global economy prompted the pre-emptive monetary easing.
- Having deployed policy buffers against downside risks to the economy, we expect BNM to stand pat on the OPR at 3.00% for the rest of 2019.
BNM cuts OPR rate by 25bp to 3.00%…
Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) has cut the Overnight Policy Rate (OPR) by 25bp to 3.00%, the first policy change in eight meetings, against our expectations of a hold. Forecasters were split ahead of the decision, with the Bloomberg consensus marginally skewed towards an OPR cut. The ceiling and floor rates of the OPR corridor were correspondingly reduced to 3.25% and 2.75%, respectively.
Despite acknowledging the resilience of domestic financial markets to bouts of volatility, the MPC statement pointed out BNM’s discomfort with signs of tightening in domestic financial conditions. Inflation undershot expectations again in March, keeping real interest rates at elevated levels. Commercial bank lending rates had been creeping higher (+10bp between September 2018 and March 2019) while loan growth slipped to a 10-month low of 4.9% yoy in March. The OPR cut was intended to maintain monetary accommodativeness in line with its price stability mandate, in light of the risks posed to BNM’s baseline GDP growth forecast of 4.3-4.8% in 2019 (CIMB: +4.7%).
… and “considerable downside risks” in the global economy
While BNM noted that the external environment turned out better-than-expected in 1Q19 and the squeeze in global financial conditions eased, the central bank placed emphasis on “considerable downside risks” to global growth arising from the trade spats and country-specific weakness. The negative turn of events in the US-China trade negotiations and re-escalation of tariff threats over the weekend may have also nudged policymakers in the direction of easing, as BNM had estimated that the US’s imposition of 25% tariffs on its remaining imports from China and blanket auto tariffs could shave 1% pt off Malaysia’s projected GDP growth.
One and done
Today’s interest rate cut should not be interpreted as the start of an extended cycle of policy easing. Since 2011, BNM has engaged in minor one-step tweaks in monetary policy, and this time should not be any different. We retain our year-end OPR forecast of 3.00%, implying no further policy rate changes in the second half of 2019. A developing risk to our call is the abrupt breakdown in the US-China trade talks and potential intensification of a tariff tit-for-tat.
IPI growth in 2M19 (+2.5% yoy) is tracking below 4Q18’s (+3.2% yoy). Unless mining output and factory activity accelerate sharply in March, the segment’s contribution to real GDP growth could weaken in 1Q19. Nonetheless, the downside is cushioned by a recovery in the agriculture sector, particularly palm oil production. We maintain our 2019 forecasts for IPI growth (+3.7%) and GDP growth (+4.7%).
Light emerging at the end of the tunnel
Malaysia’s manufacturing PMI rebounded from 47.2 in March to 49.4 in April after new export orders increased for the first time in five months. While exports contracted 1.5% yoy in 1Q19, we think progress on a US-China trade agreement and green shoots emerging in regional industrial indicators could presage a turnaround for manufactured goods exports in 2H19.
Originally published by CIMB Research and Economics on 7 May 2019.
This article has been edited to reflect its time-sensitivity.