INTEREST RATES: MALAYSIA – TO CUT OR NOT TO CUT IN NOVEMBER

PETALING JAYA – Economists are divided over the direction of Bank Negara Malaysia’s Overnight Policy Rate (OPR) for the rest of the year on the uncertain economic outlook.

MIDF Research said the unchanged OPR announced last Wednesday came as a surprise as it had expected a cut of 25 basis points to 2.75% in September, bringing the total reduction in the policy rate to 50 basis points in the second half of the year.

Hence, the research house foresees a 25-basis point cut in the OPR in the next meeting of the central bank’s Monetary Policy Committee in November.

Hong Leong Investment Bank (HLIB) Research, however, retains its forecast for the MPC to maintain the policy rate at 3% in its November meeting due to expectations of stronger economic growth in the second half of the year.

“We note that the subdued inflation rate accords BNM (Bank Negara Malaysia) the flexibility to ease monetary policy should signs of growth disappointment emerge unexpectedly,” it said in a research note yesterday.

HLIB Research views the MPC’s neutral tone as a favourable development, with the growth outlook seen to be on track, anchored by domestic demand, especially private consumption and private investment.

BNM expects the country’s growth to expand within growth expectations of 4.0% to 4.5% in 2016, which will be supported by private consumption and private investment.

HLIB Research noted that this is in line with its expectation of growth to improve in the second half arising from continued recovery in consumption supported by measures to raise disposable income; sustained pick-up in construction sector following larger-than-expected value of local contracts awarded; gradual improvement in agriculture production given fading of the El Nino (weather phenomenon) effect, leading to a smaller decline in production on an annual basis.

It also believes there is no immediate need for BNM to lower the statutory reserve requirement ratio to increase liquidity in the banking system given that the financial system remains stable.

On inflation, HLIB Research is maintaining 2016 Consumer Price Index (CPI) growth forecast of 2%, in line with BNM’s latest inflation forecast at the lower end of the 2% to 3% range for the year.

Meanwhile, MIDF Research said the unchanged OPR will have a short-term positive impact on prices of banking sector shares under its coverage, as it may give some breathing room to banks given that net interest margins are expected to decline whenever there are cuts in OPR.

The research house expects the earlier pressure on net interest margins (NIMs) from the July cut in interest rate to eventually normalise as the rate of floating rate loans would have been adjusted downwards.

“However, we expect banks’ NIMs to continue to be compressed by high cost of funds from intense deposit competition while loan growth is expected to moderate ahead while the sector’s liquidity remains tight,” it added. – Sundaily

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