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More rate cuts expected | KLSE Screener
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More rate cuts expected

TheStar Tue, Apr 07, 2020 09:00am - 1 month ago

Given the gloomy outlook, economists expect the central bank to reduce the overnight policy rate (OPR) by at least 25 basis points (bps) at its monetary policy committee (MPC) meeting on May 5.

PETALING JAYA: Most economists expect Bank Negara Malaysia to cut interest rates again next month to support Malaysia’s faltering economy amid the Covid-19 pandemic.

Several economists also appeared more pessimistic, expecting a wider contraction than the central bank’s latest assessment of the country’s economic prospects.

Following the release of its 2019 annual report last Friday, Bank Negara said Malaysia’s gross domestic product (GDP) could contract by as much as 2% in a worst-case scenario, or grow at a mere 0.5% in the best-case scenario in 2020.

Given the gloomy outlook, economists expect the central bank to reduce the overnight policy rate (OPR) by at least 25 basis points (bps) at its monetary policy committee (MPC) meeting on May 5. Further cuts in the benchmark interest rate remain on the cards, with at least one economist expecting it to go to as low as 1.75% by the end of 2020.

The OPR is currently at 2.5%, following a 50bps cut in total during the first two MPC meetings of the year in January and March.

The most hawkish, CGS-CIMB Research reiterated its expectations of a 25bps-50bps cut from May onwards, and lowered its end-2020 forecast for OPR to 1.75%.

“The very weak inflation outlook – owing to the negative output gap and a plunge in oil prices – lowers the barrier to further monetary easing, ” the brokerage explained in its note yesterday.

While other economists also expect further monetary policy easing given the downside risks to the country’s economy, they do not foresee Bank Negara allowing the OPR to go lower than 2% by year-end. That was the level last seen during the 2008/09 Global Financial Crisis.

Among the economists that were less optimistic than Bank Negara about Malaysia’s economic prospects for 2020 were Affin Hwang Capital Research, which projected a contraction of as much as 3.5%; AllianceDBS Research, which expected -2.5% and CGS-CIMB Research, which forecast a contraction of 2.3%.

“Our GDP forecast of a contraction of 3.5% for 2020 is much lower than Bank Negara’s forecast – the main difference lies in our sharply lower growth projection on domestic demand growth, which we project at -4.0% in 2020 (7.6% in 2019), against Bank Negara’s +1.1%, ” Affin Hwang Capital Research explained, citing the impact of the movement control order (MCO) from March 18 to April 14.

“Going into the second half of 2020, as economic activity slows, we believe private consumption growth will not be normalised immediately, as households will likely be impacted from possible shocks to their incomes and a slight erosion of purchasing power, ” it added.

AllianceDBS Research concurs, noting MCO had limited consumer spending and forced closure of non-essential businesses indefinitely.

“Amid an already sluggish global economy and the recent crash in oil prices, most Malaysian firms, especially smaller sized firms with liquidity difficulties, will have to devise contingency plans if the situation continues to worsen, ” the brokerage said.

“We are expecting a recovery only by the last quarter of 2020 at the earliest. Stimulus measures will be fully absorbed by the market in eight to 10 months, ” it noted, assuming successful containment of the pandemic, global economy regaining traction and recovery of oil prices.

CGS-CIMB Research, on the other hand, said its growth projection at -2.3% deviated slightly below the lower end of Bank Negara’s forecast range on concerns that disruptions would be more persistent in tourism and transportation, as travel habits would take longer to normalise; private consumption due to unemployment and loss of income; and the services sector due to the heavy blow to small and medium-sized enterprises.

While RHB Research maintained its growth projection at 0% for Malaysia this year, the brokerage said further revisions were possible, noting risks to growth remained tilted to the downside.

“The major uncertainty is the possible prolonged and wider spread of Covid-19, as well as its sharper negative effect to the domestic and global economies. Other downside risks include prolonged low commodity prices and supply shocks, as well as heightened financial market volatility, ” it said.

“On the upside, the fiscal and monetary stimulus could spur a stronger-than-expected consumption recovery, ” it added.

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