All eyes on interest rate

All eyes are on Bank Negara, as speculation mounts on the possibility of the central bank lowering interest rates today.

Against a backdrop of a low interest rate environment and slowing growth, some bankers had alluded last month that Bank Negara could use this opportunity to cut the overnight policy rate (OPR) for the first time in seven years.

They had reasoned that this was to be in sync with the global trend of keeping interest rates low to stimulate the slowing economy.

Yesterday, the Standard Chartered (StanChart) Global Research team issued a report betting that Bank Negara could lower the OPR by 25 basis points (bps) to 3%, as the central bank’s Monetary Policy Committee (MPC) convenes today in what is to be the first meeting to be chaired by Datuk Muhammad Ibrahim as the new central bank governor.

“We expect a 25bp OPR cut from Bank Negara on May 19,” StanChart said in an outlook report on Malaysia’s rate policy.

“Weakening growth and tight fiscal leverage may warrant monetary support (from the central bank),” it reasoned.

However, StanChart’s view is not shared by the other economists. A survey by Bloomberg showed that StanChart was the sole institution to expect an OPR cut, while the other 20 brokerages and investment banks expect the OPR to remain unchanged at 3.25%.

StanChart, however, conceded that Bank Negara may delay the move to cut the OPR due to the high household indebtedness and that the Malaysian economy, although having slowed down, was not as weak as those of developed countries.

Bank Negara has left OPR unchanged at 3.25% since July 2014, after raising the rate by 25bps from 3%.

The last time the central bank cut the OPR was during the onslaught of the 2008/09 global financial crisis, when a cumulative 150bps were cut from the historical high of 3.5% to 2% over three consecutive MPC meetings in November 2008, January 2009 and February 2009. Meanwhile, the overnight release of the minutes from the Federal Open Market Committee’s April 26-27 meeting is expected to shed more light on the risks of an interest rate hike or a delay of the decision by the US Federal Reserve.

This could have a bearing on Bank Negara’s policy decision.

Nevertheless, StanChart noted that growth conditions in Malaysia had weakened meaningfully since Bank Negara last revised the OPR in July 2014, and the outlook remained challenging for the third-largest economy in South-East Asia.

For instance, it pointed to loan growth, which fell to its lowest since 2007 in March this year at 6.4%.

Similarly, Malaysia’s gross domestic product (GDP) grew at the slowest pace in seven years at 4.2% during the first three months of the year to March 2016, as weak exports and sluggish domestic demand continued to weigh on the prospects of the trade-dependent economy.

“While growth may not be low versus other developed economies, we believe it should be compared against Malaysia’s own potential growth,” StanChart said.

“Finally, we do not believe a 25bp cut will cause increased leverage. Given the current conditions, we think a 25bp cut will help with debt servicing rather than increase the financial imbalance,” it added.

Meanwhile, Maybank Investment Bank Research and RHB Research also saw the possibility of Bank Negara lowering the OPR by 25bps in the future.

“A sharp slowdown in money supply growth suggests that things are not well in the economy and may warrant further policy easing or stimulus from the authorities to arrest a down shift in growth before it is too late. It remains to be seen whether the newly appointed governor will take any action to support the economy,” RHB Research said.

The brokerage noted that Bank Negara had earlier highlighted that cutting interest rates from the current level would unlikely generate much marginal growth for Malaysia’s economy, but could lead to disintermediation of savings, perpetuate excessive risk taking by borrowers and risk building up financial imbalances that could be equally damaging to the economy.

“Still, something needs to be done, either through monetary or fiscal policy or a combination of both, to support the economy,” RHB Research said.

While it would still maintain its expectations for Bank Negara to keep the OPR unchanged at 3.25% through 2016, given the central bank’s more optimistic forecast for a better second-half performance, RHB Research said it was becoming increasingly wary of the rising downside risks of economic growth slowing more than expected.

This, it said, would increase the chances of the central bank leaning towards a 25bp cut of the OPR in the second half of 2016.

Similarly, Maybank Investment Bank said, “We are also not ruling out the possibility of an OPR cut by Bank Negara this year, as the central bank commented on growth facing downside risks in its press release on the first quarter-2016 GDP growth, hence our OPR forecast range of 3%-3.25%.”

“Economic data between now and August 2016 will be crucial in determining whether quarterly growth has bottomed or not,” it said.

Among countries in the region that had eased their monetary policies in recent months were Indonesia, Singapore, India and Australia.

Bank Indonesia has cut its benchmark interest rates three times since the start of 2016 by a cumulative 75bps to support its slowing economy, while last month saw the Monetary Authority of Singapore surprisingly devaluing its currency amid deflationary risks, and the Reserve Bank of India cutting its benchmark interest rates to a five-year low of 6.5%.

The Reserve Bank of Australia, on the other hand, cut its interest rates early this month to a record low of 1.75% to boost the country’s economy.

Bank of Japan had early this year pushed its economy into negative interest rates, while Taiwan unveiled its third consecutive rate cut in March.